UNIVERSITY 

OF  CALIFORNIA 

LOS  ANGELES 


SCHOOL  OF  LAW 
LIBRARY 


PUBLIC  UTILITY  RATES 


McGraw-Hill  Book  Company 


Electrical  World         The  Engineering  and  Mining  Journal 
Engineering  Record  Engineering  News 

Railway  Age  Gazette  American  Machinist 

Signal  Engineer  American  Engineer 

Electric  Railway  Journal  Coal  Age 

Metallurgical  and  Chemical  Engineering  P  o  wer 


PUBLIC  UTILITY 
RATES  'Sill 


A  DISCUSSION  OF  THE  PRINCIPLES  AND  PRACTICE 

UNDERLYING   CHARGES  FOR  WATER,   GAS, 

ELECTRICITY,  COMMUNICATION  AND 

TRANSPORTATION  SERVICES 


BY 


HARRY   BARKER,   B.S. 

\\\ 

Mechanical  and  Electrical  Engineer,  Associate  Editor  of  Engineering 
News,  Member  American  Institute  of  Electrical  Engineers. 


FIRST  EDITION 


McGRAW-HILL  BOOK  COMPANY,   INC. 

239  WEST  39TH  STREET.    NEW  YORK 


LONDON:  HILL  PUBLISHING  CO.,  LTD. 
6  &  8  BOUVERIE  ST..  E.  C. 

1917 


T 

1917 


COPYRIGHT,  1917,  BY  THE 
McGRAW-HILL  BOOK  COMPANY,  INC. 


Stanhope  Jbrcss 

F.    H.  GILSON  COMPANY 
BOSTON,  U.S.A. 


PREFACE 


THE  collection  and  formulation  of  these  notes  have  been  under 
way  about  eight  years.  Before  utility  questions  had  attained  their 
present  popularity,  the  author  felt  (in  following  the  discussion  of 
public-service  questions  at  engineering  conventions  and  from  the 
varied  acquaintance  of  an  engineering  editor)  that  a  comprehensive 
discussion  of  (1)  such  corporation  and  municipal  activities  as  affect 
•service  and  rates,  (2)  the  trend  of  public  opinion  and  court  and 
commission  decisions,  and  (3)  the  most  important  engineering  and 
economic  problems  involved,  would  be  useful  to  many  who  have  to 
deal  first-hand  with  one  phase  or  another  of  public  service.  Very 
many  men  who  have  seemed  to  be  interested  in  all  phases  of  these 
problems  have  not  had  the  time  or  opportunity  to  study  the  con- 
flicting and  reiterative  ideas  of  the  scattered  documents,  pamphlets, 
and  papers  which  very  largely  form  the  literature  of  the  subject. 
There  has  seemed  to  be  a  desire  among  public  utility  officials  to 
throw  off  the  blinders  of  daily  duties,  and  to  study  what  some  are 
pleased  to  call  "the  academic  questions"  of. their  business.  The 
writer  hopes  to  make  that  possible  here. 

It  has  seemed,  as  the  notes  have  grown  in  these  years,  that  if 
the  main  lines  of  some  broad  survey  of  the  rate  problem  could  be 
given,  free  from  the  mass  of  obscuring  detail  which  necessarily 
marks  individual  cases,  then  the  contemplated  review  would  be  of 
some  service  to  lawyers  and  legislators,  to  editorial  writers  of  the 
daily  press,  to  students  of  municipal  affairs  and  even  to  some  part 
of  the  general  public.  For  this  varied  service,  although  the  in- 
herent nature  of  these  studies  demands  essentially  an  engineering 
and  economic  analysis,  an  attempt  has  been  made  to  keep  the 
pages  understandable  to  men  not  technically  trained.  Partly  for 
such  readers  are  the  brief  reviews  of  history  and  technology  of 
railroads,  electric  railways,  water-works,  and  gas,  electricity  and 
telephone  utilities,  given  in  the  chapters  on  special  problems. 
But  even  the  technical  reader  of  these  pages  must  give  heed  to 
the  history  and  technology  of  any  utility  whose  rates  he  studies. 


VI  PREFACE 

s 

This  is  particularly  true  in  comparing  the  fixed  charges  in  different 
fields. 

A  presentation  of  rate  problems  cannot  be  evolved  out  of  inner 
consciousness  as  can  a  novel  or  poem.  It  must  be  based  on  an 
accumulation  of  separate  contributions  to  the  thought  on  the 
subject  —  with  perhaps  new  explanations  here,  a  realinement 
there,  and  a  different  deduction  elsewhere.  It  is  hoped,  however, 
that  the  mere  presentation,  in  one  volume,  of  the  diverse  phases 
of  rate  making  may  be  of  service  in  provoking  thought  —  in  spite 
of  the  inherent  shortcomings  of  the  text.. 

The  author  has  felt  that  such  a  review  of  essential  facts  and 
principles  can  best  be  arranged  by  some  third  impartial  party,  such 
as  an  editor  of  an  engineering  journal  —  being  affiliated  neither 
with  a  public-service  corporation  nor  a  regulating  commission,  but 
in  touch  with  both  and  not  confining  all  his  attention  to  the  field 
of  one  utility  class.  It  seems  reasonable  that  such  a  third  party 
can  most  easily  attempt  to  approach  the  several  and  conflicting 
viewpoints  and  can  best  endeavor  to  pick  out  the  essential  elements 
of  the  problems  in  the  most  nearly  unbiased  manner  because  free 
from  the  pursuit  of  petty  details  and  the  irritating  distractions  of 
daily  administration. 

With  the  foregoing  ideas  in  mind,  the  author  has  carefully 
studied  the  wealth  of  discussion  that  has  come  to  him  and  he  has 
very  gradually  formulated  this  presentation.  It  is  admittedly 
incomplete  and  possibly  defective,  but  it  is  hoped  that  continued 
open-minded  study  and  discussion  may  enable  the  reader  to  bridge 
gaps  and  eliminate  fallacies.  It  is  only  fair  to  all  approaching  the 
subject  with  open  mind,  to  warn  them  that  some  of  the  author's 
opinions,  while  supported  by  the  views  of  many  eminent  engineers 
and  economists,  are  not  yet  accepted  by  some  others  equally  promi- 
nent. An  attempt  has  been  made  where  such  divergence  exists,  to 
present  the  diverging  ideas.  Acknowledgment  is  here  made  to 
many  prominent  specialists  in  the  several  utility  branches  for  their 
ready  cooperation  and  frank  criticism  of  the  author's  notes  at 
various  stages  of  growth.  Their  number  and  modesty  prevent 
more  complete  and  specific  credit. 

It  probably  will  seem  to  the  public  commissioner,  to  the  company 
official,  or  the  consulting  engineer,  that  innumerable  important 
details  have  been  omitted.  The  author  feels,  however,  that,  in 
spite  of  the  importance  of  interpretations  of  principles  in  each  con- 


PREFACE  Vll 

crete  case,  the  inclusion  of  more  detail  here  would  obscure  the 
fundamental  points  that  need  to  be  emphasized  —  besides  giving 
a  book  that  would  rival  an  unabridged  dictionary  in  size  arid  re- 
quire a  lifetime  to  prepare. 

It  might  be  well  to  remark,  perhaps,  that  the  author  does  not 
believe  in  any  inherent  iniquity  of  corporations,  in  spite  of  the 
occasional  mismanagement  of  officers  of  quasi-public  enterprises 
and  the  laxity  of  directors.  He  trusts  that  these  notes  accordingly 
will  be  found  temperate  in  tone  and  fair  toward  such  organiza- 
tions. On  the  other  hand,  he  recognizes,  in  the  magnitude  and 
complexity  of  modern  organization  schemes,  opportunities  for 
hiding  grave  abuses;  and  he  does  not  feel  that  any  man  who  has 
the  requisite  ability  and  energy  to  cultivate  or  exploit  public  serv- 
ice should  be  allowed  to  do  so  solely  for  private  profit,  without 
some  effective  oversight  and  chance  for  restraint.  It  is  to  be  hoped 
that  the  author  will  not  be  classed  as  an  apologist  for  the  cartoon 
type  of  public-service  magnate  if  such  exists  to-day;  he  agrees 
that  with  the  absolute  disappearance  of  the  men  who  organize 
corporations  solely  for  the  sake  of  large  and  speculative  promotion 
profits,  and  not  for  the  more  moderate  and  certain  returns  of  daily 
service,  there  will  come  a  better  day,  for  both  the  public  and  the 
corporations. 

H.  B. 

NEW  YORK  CITY, 
January,  1917 


CONTENTS 


PAGE 

PREFACE v 

CHAPTER  I 

DEVELOPMENT  OF  UTILITY  REGULATION;    UTILITY  PRIVILEGES  AND 

OBLIGATIONS;  RIGHTS  OF  THE  PUBLIC 1 

Political  place  of  utility  regulation.  —  Definition  of  public  utility. 
—  Privileges.  —  Obligations.  —  Rights  of  the  public. 

CHAPTER  II 

PRODUCT  AND  SERVICE  COMPANIES;  SOME  DEFINITIONS  OF  RATES  AND 

SERVICES 5 

Two  classes  of  companies.  —  Product  storage.  —  Service  capac- 
ity. —  Class  costs.  —  Two  classes  of  rates.  —  Split  rates.  —  Twi- 
light zones.  —  Relative  importance  of  low  rates. 

CHAPTER  III 

VARIOUS  BASES  FOR  RATES 10 

Cost  of  service  a  necessary  approach.  —  "Cost"  replacing 
"worth."  —  Use  of  cost  not  new.  —  An  unsound  basis.  —  A  fair 
basis.  —  Courts  do  not  fix  reasonableness.  —  Need  of  classifying 
customers.  —  Classes  promote  simplicity.  —  Off-peak  classes.  — 
Individual  diversity  factors.  —  Strict  equity  versus  general  welfare. 

CHAPTER  IV 

DETAILS  OF  THE  COST-OF-SERVICE  STUDY  OF  RATES;  TEST  FOR  FIXED 

AND  OPERATING  CHARGES 18 

Test  schedules.  —  General  cost  of  service.  —  Preliminary  survey 
of  profits.  —  True-cost  schedule.  —  The  problem  of  apportioning 
costs  on  customers.  —  A  test  for  fixed  charges.  — •  Apportionment 
of  taxes.  —  Apportionment  of  depreciation  expense.  —  Deprecia- 
tion expense  as  an  operating  cost.  —  Depreciation  expense  as  a 
fixed  charge.  —  Apportionment  of  amortization.  —  Apportionment 
of  general  expense.  —  Distribution  of  metering  cost.  —  Labor.  — 
Service  losses.  —  Limitations  of  test  for  apportionment.  —  Revised 


X  CONTENTS 

PAGE 

cost  schedule.  —  Simplicity  in  rates.  —  Customer  groups.  —  Dis- 
tribution of  fixed  charges.  —  Importance  of  studying  individual 
diversity.  —  Ends,  not  means,  sought.  —  Minimum  charges  to 
cover  readiness.  —  Study  of  hypothetical  case. 

CHAPTER  V 

FAIR  VALUE  OF  UTILITY  PROPERTY 36 

What  is  fair  value?  —  Market  value  as  a  basis.  —  Investment 
as  a  basis.  —  Equivalent  substitute  basis.  —  What  basis  to  use.  — 
Investment  as  a  datum.  —  Court  decisions  on  fair  value.  —  Court 
decisions  not  yokes  and  fetters.  —  Court  errors.  —  False  respect 
for  precedent.  —  Other  values  than  "rate-basis  worth."  —  Valua- 
tion for  various  purposes.  —  Value  of  favorable  contracts.  — 
Worth  as  disclosed  by  accounts.  —  Worth  as  disclosed  by  ap- 
praisal. —  Actual  or  substitute  plant?  —  Bearing  of  original  con- 
ditions. —  Depreciated  value  as  a  basis  of  rates.  —  Use  of  apprecia- 
tion in  value. 

CHAPTER  VI 

VALUATION  AS  AN  ENGINEERING  TASK;  APPRAISAL  OF  LAND  AND  WATER 

RIGHTS 52 

The  general  problem.  —  Selecting  the  engineers.  —  Helping  or 
hindering  the  engineer.  —  Cost  of  appraisal.  —  Preliminary  in- 
vestigation. —  The  inventories.  —  Unit  prices.  —  Short  cuts  in 
appraisals.  —  Appraisal  of  real  estate.  —  Cost  of  condemnation.  — 
Denial  of  condemnation  cost.  —  Value  of  adaptability.  —  Value 
for  paving  over  mains.  —  Value  of  franchises.  —  Water  rights 
to  be  considered.  —  Better  understanding  needed  of  water 
rights.  —  Rights  as  real  estate.  —  Splitting  the  value  of  rights.  — 
Comparing  two  rights.  —  Valuation  of  rights  by  earning  capacity. 

—  Short-cut    steam-power   comparison.  —  Value  of  rights   under 
regulation.  —  Values    appurtenant   to   water   rights.  —  A   water- 
rights    fallacy.  —  Valuation    of    storage    reservoirs.  —  Omissions 
in  inventory.  —  Allowances  for  overhead  charges.  —  Cost  of  ad- 
ministration,    organization     and     preliminary     investigations.  — 
Interest  during  construction  period.  —  Taxes  during  construction 
period.  —  Insurance      during      construction.  —  Piecemeal      con- 
struction. —  Contractor's    profit.  —  Engineering    design    and    in- 
spection. —  Architect's  fees.  —  Influence  of  contingencies.  —  Data 
on  engineering  and  contingencies.  —  Bond  commissions  and  dis- 
counts. —  The  value  of  discarded  plants.  —  Promoter's  profit.  — 
Business    development    investment;     "going-concern    value."  — 
Accrued  deficits  as  a  measure  of  going  value.  —  Wisconsin  method 
of  estimating  going  value.  —  Reproduction  of  going-concern  value. 

—  Depreciation  as  a  measure  of  going  value.  —  Amortization  of 
intangible  values.  —  Effect  of  good  design  or  favorable  location.  — 
Sudden  reduction  of  value. 


CONTENTS  XI 

CHAPTER  VII 

PAGE 

REASONABLE   RETURN;    INTEREST;     COMPENSATION   FOR   RISK   AND 

ATTENTION;  EXTRA  PROFITS ' 96 

What  is  reasonable  return?  —  Pure  interest.  —  Compensation  for 
risk.  —  Factors  increasing  risk.  —  Compensation  for  attention.  — 
Prospect  of  extra  profits.  —  Super-profits  through  infrequent  rate 
revisions.  —  Dividing  scales.  —  The  fair  division  of  excess  profits. 

—  Freedom  from  lax  management.  —  Surplus  profits  as  compen- 
sation for  early  inadequate  return.  —  Official  burdens  not  a  basis 
for  profits. 

CHAPTER  VIII 

DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES 107 

Liability  for  retirement.  —  "Depreciation"  too  loosely  em- 
ployed. —  "Depreciation"  properly  used. '- —  "  Retirance"  a  repay- 
ment of  lost  investment.  —  Subdivision  of  retirance.  —  Relations 
between  depreciation  and  retirance.  —  Relations  between  appraised 
value  and  retirance.  Failures  to  collect  retirance.  —  Computing 
annual  depreciation  and  retirance.  —  Maintenance  plan.  —  Ap- 
praisal plan.  —  Straight-line  scheme.  —  Sinking-fund  plan.  — 
Modified  straight-line  schemes.  —  Annual  cost  of  service  and 
actual  depreciation. — •" Equal-annual-payment"  scheme  for  com- 
puting retirance.  —  Objections  to  the  equal-annual-payment  plan. 

—  Depreciation  under  increasing  operating  costs.  —  The  Supreme 
Court  on  retirance  methods.  —  Lower  courts  on  sinking-fund  re- 
tirance. —  Choice   of   retirance   plans.  —  The   famous   hen   argu- 
ment. —  Other  depreciation-computation  plans. 

CHAPTER  IX 
MISCELLANEOUS  PROBLEMS  INDIRECTLY  RELATED  TO  RATE-MAKING    134 

Problems  old  and  new.  —  The  future  of  regulation.  —  Avenues 
of  regulation.  —  Common  powers  of  a  commission.  —  Public  re- 
gard of  franchises.  —  Franchise  value  in  rate  basis.  —  Other  regards 
of  franchises.  —  Short-term  franchises.  —  Indeterminate  franchise. 

—  The  interference  of  public  utilities.  —  Cost  of  changes  to  avoid 
interference.  —  Improper    activities.  —  Undue    discrimination.  — 
Utilities    in    politics.  —  Preventing    over-capitalization.  —  Broad 
public  policy.  —  An  utility  should  relieve  public  burdens.  —  Re- 
duce company  burdens.  —  Secure  full  publicity.  —  Competition  or 
monopoly.  —  Some  results  of  monopoly.  —  Lessons  from  compe- 
tition.—  Potential    competition   a    constant    restraint.  —  Lighten 
future  burdens.  —  No  call  for  industrial  legacies.  —  The  vicious 
cost     spiral.  —  Preventing    higher    costs.  —  Reduce    unit    labor 
costs.  —  Cause   of  inefficient    labor.  —  Satisfactions    of  labor.  — 
Utility  labor  in  an  enviable  position.  —  Higher  rates  or  greater 
economy.  —  Scarcity   of   funds   for   investment.  —  Better  public 
relations.  —  Better  ideas  of  service  needed. 


xil  CONTENTS 

PAGE 

CHAPTER  X 

PROBLEMS  OF  RAILWAY  RATES 161 

Problems  of  specific  utilities.  —  Magnitude  of  the  railway  in- 
dustry. —  Beginnings  of  the  railway  industry.  —  Development 
of  governmental  regulation.  —  Power  of  eminent  domain  an  early 
mark.  —  Early  beginnings  of  public  regulation.  —  The  Interstate 
Commerce  Commission  established.  —  The  railway  as  a  service- 
type  utility.  —  Difficulty  of  applying  "cost  of  service"  to  rates.  — 
Expenses  independent  of  traffic.  —  "Law  of  joint  costs."  —  "Law 
of  increasing  returns."  —  Renewing  separation  of  operating  ex- 
penses. —  How  freight  charges  are  figured.  —  Classification  of 
freight.  —  Trunk-line  rate  system.  —  Zone  rates  for  transcon- 
tinental freight.  —  Southern  basing-point  system.  —  Early  Inter- 
state Commerce  Commission  rates.  —  Effect  of  value  of  com- 
modity. —  Effect  of  market  price  of  competing  products.  —  How 
cost  of  service  has  been  used.  —  Cost  of  carrying  competing  prod- 
ucts. —  Geographical  comparisons  of  cost.  —  Effect  of  carload  lots 
on  cost.  —  Effect  of  distance  on  cost  of  transport.  —  Risk  as  a  factor 
in  rates.  —  Sum  of  locals  and  maximum  through  rate.  —  Federal 
versus  state  rates.  —  The  effect  of  water  competition.  —  Railway 
route  competition  and  rates.  —  Limits  to  route  competition.  — • 
Competition  of  seaports.  —  Competition  of  private  producers.  — 
Vested  interests  protected.  —  Some  rates  fixed  by  general  public 
interest.  —  Rates  not  allowed  to  overcome  natural  advantages.  — 
Competition  of  localities  fostered.  —  Railway  passenger  rates.  — 
Commission  control  of  passenger  fares.  —  Appreciation  and  de- 
preciation of  railroad  property.  —  The  valuation  of  American 
railways.  —  Organization  of  the  federal  valuation.  —  Suggested 
economies  in  railroad  operation. 

CHAPTER  XI 

PROBLEMS  OP  EXPRESS  TRANSPORTATION  RATES 201 

Relations  of  express  companies.  —  Worth  of  express  companies. 

—  Recent  improvements  in  express  rates.  —  The  old  express  rate 
system.  —  The     interstate     express-rate     system.  —  Rates    made 
between  geographical  blocks.  —  Tentative  scheme  inadequate. 

CHAPTER  XII 

RATE    PROBLEMS    OF    STREET   AND    INTERURBAN    RAILWAY    TRANS- 
PORTATION       208 

Rise  of  city  transit.  —  Some  technical  features.  — •  Depth  of 
organization.  —  Reasons  for  nickel  fares.  —  Growth  of  city  systems. 

—  Early  departures  from  nickel  fares.  —  Electric  traction  no  pre- 
vention of  congestion.  —  Natural  step  to  suburban  and  interurban 
lines.  —  Financial   status  of  the  industry.  —  Peculiarities   as  an 
utility.  —  Tests  for  fixed  charges,  etc.  —  Fixing  the  fare.  —  Wia- 


CONTENTS  Xlil 

PAGE 
consin  idea  of  fares.  —  Apportionment  of  standard  account  items. 

—  Substituting  car  unit  for  passenger.  —  Effect  of  peak  loads.  — 
Reasonable  length  of  trips  on  individual  lines.  —  Practical  fixing 
of  zone  fares.  —  Traffic  surveys.  —  Constitution  of  good  service.  — 
Contrasts  between  old  and  present  costs.  —  Depreciation  of  electric- 
railway    property.  —  Securing    retirance.  —  Rapid    transit     and 
rates.  —  The     transfer     problem.  —  Jitney-bus     competition. — 
Cleveland  3c.  fare  campaigns.  —  Cleveland  city-control  ordinance. 

—  Objections  to  the  Cleveland  scheme.  —  Milwaukee  zone  system. 

—  Milwaukee  ticket  system. 

CHAPTER  XIII 

PROBLEMS  OF  WATER  RATES 240 

Development  and  magnitude  of  industry.  —  Water-works 
as  utilities.  —  Regulation  of  water  utilities.  —  Varied  requirements 
for  good  water.  —  Water-works  technology.  —  Water  consump- 
tion. —  Fire  service  or  domestic  supply  first?  —  Charges  for  fire 
protection.  —  The  delusions  of  "hydrant  rentals."  —  Lump  sum 
for  fire  protection.  —  Effect  of  fire  service  on  water-works  costs.  — 
Quantity  of  water  to  be  provided  for  fire  service.  —  Per  capita 
cost  of  fire  protection.  —  What  is  the  value  of  fire-protection  service? 

—  Charges   for   private   fire   protection.  —  Distributing   costs   of 
comprehensive  system.  —  Cost  accounting  for  water-works.  —  Pre- 
venting water  waste.  —  Minimum  charges  for  water.  —  Proposed 
standard  rate  form. 

CHAPTER  XIV 

RATE  PROBLEMS  OF  GAS  UTILITIES 277 

Development  and  magnitude  of  gas  industry.  —  Gas-works 
technology.  —  Uniform  rate  persists.  —  Variation  in  gas  cost  for 
large  use.  —  Gas-utility  accounting.  —  Natural-gas  utilities.  — 
New  Baltimore  schedules.  —  How  Baltimore  schedules  were  made. 

—  Results  in  Baltimore. 

CHAPTER  XV 

RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS 300 

Nearly  all  utility  problems  encountered.  —  History  of  the  elec- 
tric central  station.  —  Secrets  of  early  success.  —  First  central 
station.  —  Uses  for  electricity.  —  Technology  of  supply.  —  Develop- 
ment of  lighting.  —  Difficulties  of  continuous  service.  —  Importance 
of  the  meter.  —  Maximum  demands  of  electric  customers.  —  Di- 
versity of  central  station  loads.  —  Residence  tariffs.  —  Norwich 
tariff.  —  "Telephone"  tariff.  —  Wisconsin  system.  —  The  Detroit 
system.  —  Canadian  cities  system.  —  The  Kapp  rate  system.  — 
Comparison  of  rates  in  American  cities.  —  Isolated  plants  and 
breakdown  service.  —  Charges  for  street  lighting. 


xiv  CONTENTS 

PAGE 

CHAPTER  XVI 

PROBLEMS  OF  TELEPHONE  RATE-MAKING 318 

Some  telephone  history.  —  Development  of  the  business.  —  Long- 
distance service.  —  Telephone  technology.  —  Automatic  telephone 
systems.  —  Telephone  service  compared  with  transportation.  — 
Importance  of  adequate  telephone  service.  —  Peculiarities  of  tele- 
phone investments.  —  Development  of  rate  system.  —  Value  of  serv- 
ice used  in  the  past.  —  Commission  regulation  of  telephone  rates. 
—  Commission  study  of  value  of  service.  —  Telephone  cost  analy- 
sis.—  Chicago  telephone  studiesr — Massachusetts  commission 
cases.  —  Wisconsin  commission  cases.  —  Classification  of  sub- 
scribers. —  Bases  for  apportioning  expenses.  —  Adjusting  for 
interdependence.  —  Wisconsin  cost  analysis.  —  Cost  analysis  in 
Milwaukee  case.  —  American  telephone-rate  examples. 

APPENDIX  A 347 

B 352 

C 366 

D 370 

INDEX..  373 


PUBLIC  UTILITY  RATES 


CHAPTER  I 

DEVELOPMENT   OF  UTILITY  REGULATION;  UTILITY 

PRIVILEGES   AND   OBLIGATIONS;  RIGHTS 

OF  THE  PUBLIC 

Political  Place  of  Utility  Regulation.  —  It  is  obvious  that 
a  second  great  American  experiment  in  civil  government  is 
under  way.  The  primary  experiment,  of  course,  is  our  particular 
arrangement  of  a  democracy  under  a  legislative-executive-judicial 
division  of  function;  the  second  is  the  control  of  quasi-public 
industry  by  powerful  combined-function  agents  (railroad  and 
utility  commissions)  of  the  legislatures,  both  state  and  national. 

The  best  forms  of  regulative  legislation  evidently  were  framed 
by  men  who  saw  possibilities  of  curing  grave  corporate  abuses, 
though  the  passage  of  regulating  acts  probably  was  helped  by 
those  who  saw  new  prospects  of  political  capital. 

Good  state-commission  regulation  and  the  appointment  of 
capable  and  conscientious  commissioners,  on  the  whole,  continues 
steadily  to  increase.  The  evidences  of  superior  value  in  state 
regulation  over  local  legislative  control  must  be  appreciated  by  the 
mass  of  thinking  and  influential  voters  of  the  country  or  this 
could  not  be  true. 

These  commissions  are  given  powers,  more  or  less  broad  in  the 
several  cases,  over  financial  arrangements,  general  operating 
results  desired,  and  over  rates.  At  first  only  operation  and  rates 
were  put  under  scrutiny;  but  it  was  found  in  very  many  cases 
that  full  control  of  service  and  rates  was  impractical  without  a 
considerable  power  over  capitalization  and  the  issue  of  securities, 
so  that  the  tendency  is  to  add  this  last. 

There  are  many  who  decry  this  supervision  over  corporations, 
forgetting  perhaps  that  the  corporation  is  a  creation  of  the  state, 
an  artificial  personal  entity  brought  into  being  primarily  for  the 

1 


2  PUBLIC  UTILITY  RATES 

promotion  of  public  welfare  —  directly  or  indirectly.  If  it  be  a 
child  of  the  people's  creation,  surely  it  ought  to  answer  to  the 
public  for  its  acts  and  be  willing  to  give  all  information  about  its 
activities  that  may  not  adversely  affect  its  business,  perhaps 
eventually  confidentially  reporting  to  the  state  or  national  govern- 
ment what  is  reserved  from  general  publication. 

A  common  avenue  for  commission  control  is  in  the  matter  of 
charges.  This  directly  affects  the  people  and  makes  a  greater 
impression  on  the  body  politic  than  any  equal  attention  to  safety 
and  adequacy  of  service  or  to  the  issue  of  securities.  It  is  there- 
fore of  immediate  use  to  have  widely  disseminated  sound  knowl- 
edge of  how  rates  may  be  fairly  governed.  Fortunately,  general 
principles  are  more  crystallized  here  than  in  many  other  matters 
of  regulation,  for  the  latter  depend  much  more  on  local  necessities 
and  often  involve  the  application  of  a  mere  sense  of  common 
justice  rather  than  any  economic  principles  or  elements  of  law 
and  engineering.  It  must  not  be  supposed,  however,  that  local 
conditions  may  not  profoundly  affect  rates.  In  any  rate  case, 
as  complete  a  study  of  the  local  situation  as  is  possible  must  be 
made  —  and  some  situations  will  arise  when  adequate  precedents 
cannot  be  found  and  a  logical  analysis  cannot  be  perfected. 
Throughout  this  work,  therefore,  emphasis  will  be  placed  on  the 
latitude  to  be  allowed  rate  makers  from  formal  statements  of 
principles  and  precedent  which  at  times  may  be  but  convenient 
points  of  departure. 

These  studies  into  testing  the  reasonableness  of  charges  for 
public  service  are  made  with  a  few  basic  propositions  in  view 
which  it  is  well  to  state  at  the  outset. 

Definition  of  Public  Utility.  —  A  concern  having  special 
rights  to  use  public  property  (like  highways)  and  serving  the 
general  pubh'c  conducts  a  true  "public  utility"  when  its  service 
has  passed  the  state  of  being  a  mere  luxury  or  convenience  for 
the  few  and  has  become  a  necessity  in  the  conduct  of  business 
and  ordinary  life  of  the  many.  (Before  that  condition  is  reached, 
the  concern  does  merely  a  "quasi-public"  business,  more  or  less 
of  public  interest  and  in  which  the  government  has  specific  limited 
rights  to  interfere.) 

This  definition  does  not  exclude  all  concerns  whose  business 
does  not  immediately  involve  every  citizen  (as  does  that  of  a 
water  company);  it  includes  enterprises,  like  electricity-supply 


DEVELOPMENT  OF  UTILITY  REGULATION  3 

works,  which  serve  many  citizens,  but  by  no  means  all,  and  whose 
service  is  a  growing  public  convenience  though  seldom  a  complete 
necessity. 

Privileges.  —  A  concern  furnishing  a  public  service  enjoys  a 
privilege  not  to  be  unduly  exploited  by  the  company,  not  to  be 
the  excuse  for  abuse  by  the  citizens  and  not  to  be  the  cause  of 
harassment  by  the  government. 

A  concern  that  has  eliminated  competition  within  some  field  of 
activity,  or  has  come  into  a  control  of  a  trade  without  the  approval 
of  the  customers  and  the  public  generally  must  always  be  prepared 
to  justify  every  action  or  else  permit  and  expect  public  scrutiny 
of  every  act.  This  applies  to  business  in  necessary  commodities 
perhaps  even  more  than  to  service  concerns.  There  is  reason  to 
expect  an  extension  of  present  utility-regulation  ideas  more  and 
more  into  general  business. 

Obligations.  —  The  conduct  of  a  true  public-utility  business 
involves  several  definite  obligations.  There  is  first  that  of  giving 
the  most  satisfactory  and  complete  service  which  the  needs  of 
the  people,  the  state  of  the  art  involved,  and  the  local  physical 
limitations  and  finances  permit.  Secondly,  there  is  need  of  secur- 
ing from  the  customers  the  common  local  rates  of  interest  on  prop- 
erty involved,  plus  a  just  compensation  for  all  the  risks  of  the 
business  as  a  venture  and  perhaps  some  small  extra  return  for 
giving  especially  good  and  careful  service,  or  for  the  continued 
reduction  of  costs  and  rates  through  careful  attention  to  improved 
processes,  or  for  the  pursuit  of  an  especially  broad  and  beneficent 
public  policy. 

Rights  of  the  Public.  —  The  public  may  properly  take  all 
precautions  to  protect  itself,  as  a  civic  unit,  as  customers  or  as 
stockholders,  against  vicious  franchise  obligations  and  privileges, 
and  against  pernicious  activity  either  by  or  against  the  public- 
utility-  concern.  In  the  conflict  of  interests,  however,  the  prin- 
ciple of  "the  greatest  good  to  the  greatest  number"  is  to  be 
applied. 

No  distinction  has  been  made  in  these  discussions  between 
personal  or  corporate  ownership  of  a  public  utility,  and  little  for 
municipal  operation.  For  convenience,  reference  has  been  made 
throughout  to  public-utility  "companies."  But  the  remarks 
apply  equally  whether  one  man  holds  the  property  or  a  thousand 
own  the  stock  of  a  service  corporation;  they  should  apply  also 


4  PUBLIC  UTILITY  RATES 

to  the  public-utility  departments  of  a  municipality  like  the  water- 
or  electric-supply  works.  There  is  possibly  no  greater  field 
(geographically  and  in  aggregate  injustice)  of  discrimination  and 
unfair  rates  than  among  the  municipally  owned  utilities.  For 
instance,  in  a  water-works  department  the  charges  for  fire-hydrant 
service,  which  are  assessed  on  each  taxpayer,  may  be  heavy  to 
permit  of  low  rates  for  general  supply  or  may  be  so  light  as  to 
throw  an  undue  burden  on  the  consumer  —  distinguished  from 
the  taxpayer.  In  gas  or  electric  service  a  deficit  from  supplying 
ordinary  consumers  at  too  low  rates  may  be  prevented  by  high 
charges  for  street  lights.  The  municipalities  should  be  amen- 
able to  the  same  demands  for  reasonable  rates  and  adequate  serv- 
ices as  private  plants.  This  sort  of  control  has  been  exercised  in 
Massachusetts  and  Wisconsin  for  many  years  but  is  not  yet 
broadly  exercised  beyond  these  states. 


CHAPTER  II 

PRODUCT   AND    SERVICE    COMPANIES;    SOME    DEFI- 
NITIONS  OF  RATES  AND   SERVICES 

Two  Classes  of  Companies.  —  Public  utilities  may  well  be 
separated  into  two  classes  in  inquiring  into  rates;  (1)  those  which 
store  and  handle  a  product  and  (2)  those  which  perform  a  service. 
Into  the  first  class,  naturally  fall  most  domestic  water  and  gas 
companies,  and  perhaps  sometimes  sewerage  and  other  wastes- 
disposal  undertakings,  or  eventually,  furnishers  of  domestic 
supplies  like  ice,  coal  and  milk.  In  the  second  class  are  electricity- 
supply  concerns,  telephone  and  telegraph  companies,  steam-  and 
electric-transportation  lines  generally,  express  companies,  and  the 
postal  service. 

Product  Storage.  —  Perhaps  the  most  distinguishing  charac- 
teristic of  the  two  classes  of  public  utilities  above  made  is  in  the 
ability  of  the  first  to  produce  (or  acquire)  and  store  a  tangible 
substance,  as  compared  with  the  inability  of  the  second  class  to 
store  a  service  in  advance  of  demand.  For  instance,  a  water 
company  often  can  continuously  impound  its  supply  at  a  uni- 
form rate  for  a  whole  day,  month,  or  season,  drawing  upon  some 
reservoir  in  larger  or  smaller  amounts  as  the  demand  may  dictate. 
A  gas  company,  similarly,  may  be  producing  gas  at  a  compara- 
tively small  but  uniform  rate  constantly,  feeding  most  of  it  into 
its  holders  from  whence  the  supply  flows  at  times  of  larger  demand. 

Service  Capacity.  —  An  electricity-supply  company  must 
have  ready  for  more  or  less  quick  service  generators  of  a  total 
capacity  equal  to  the  maximum  demand  its  customers  as  a  whole 
are  apt  to  make  at  any  time  of  the  day  or  year.  Necessarily  this 
apparatus  must  be  idle  much  of  the  time.  Storage  batteries,  to 
serve  the  function  of  the  water  reservoir  or  gas  holder,  are  not 
practicable  or  economical,  except  in  small  installations  and  for 
some  special  services.  Street  and  suburban  railways  must  have 
a  reserve  of  employees  and  equipment,  sufficient  to  handle  the 
crowds  which  may  travel  to  business  in  the  morning  and  home- 
ward at  night.  Railway  companies  must  have  spare  equipment 

5 


6  PUBLIC  UTILITY  RATES 

to  carry  with  minimum  discomfort  the  crowds  which  travel  at 
certain  seasons  or  on  certain  holidays,  and  to  move  with  minimum 
delay  the  crops  which  mature  at  certain  seasons.  The  telephone 
companies  must  have  central-office  equipment  enough  to  serve 
the  greatest  number  of  subscribers  apt  to  call  at  one  time. 

Class  Costs.  —  Thus  it  may  be  seen  that  the  manufacturing 
plants  of  the  first  class  of  utility  companies  may  work  under  con- 
ditions of  maximum  efficiency  —  that  is,  close  to  designed  capac- 
ity and  continuously.  The  investment  per  unit  of  product  then 
may  be  small  so  far  as  generating  plant  goes,  but  it  may  be  large 
for  storage  facilities.  These  conditions  are  reversed  for  the 
second  class.  The  apparatus  must  work  at  reduced  efficiency 
during  light  and  discontinuous  operation;  there  are  apt  to  be 
considerable  standby  losses  (as  in  keeping  boilers  hot  and  engines 
warm)  and  certainly  there  are  heavy  fixed  charges  on  idle  invest- 
ment. 

Two  Classes  of  Rates.  —  Two  broad  schemes  of  charging  for 
public  service  or  supply  may  be  discerned;  (1)  the  unit  charge 
and  (2)  the  flat  rate.  These  two  have  been  dubbed  also  the 
"European"  and  the  "American"  plans,  respectively. 

The  unit  charge,  or  " European  plan,"  involves  measuring  the 
amount  of  product  handled  or  service  rendered  and  making  the 
payment  bear  some  definite  relation  to  such  quantities.  The 
flat-rate  scheme,  or  "American  plan,"  consists  in  charging  a 
customer  an  agreed  sum,  more  or  less  logically  determined,  irre- 
spective of  actual  utilization  of  proffered  product  or  service, 
or  not  based  on  varying  factors  which  are  measured.  The  first 
is  the  more  logical  and  fair  in  principle  but  the  expense  of  measur- 
ing product  or  service  sometimes  makes  flat  rates  more  economical 
all  around  —  especially  with  small  customers. 

Split  Rates.  —  A  third  scheme  of  stating  rates  is  by  a  two-  or 
three-part  charge  —  under  various  names  and  disguises.  This  is 
more  seen  in  service-type  utilities  than  in  product-type.  By  many 
this  scheme  is  classed  as  a  unit-charge  plan,  and  truly  such  it  is 
—  but  carried  to  a  logical  extreme.  One  part  of  the  charge  is 
based  on  the  customer's  maximum  demand  at  any  time  (for  this 
is  related  to  the  investment  for  that  customer  in  the  service-type 
of  company).  There  is  a  second  part,  proportional  to  the  amount 
of  service  shown  by  meter  (for  this  is  related  to  the  actual  operat- 
ing cost  of  serving  a  particular  customer).  There  may  be  some- 


RATES  AND  SERVICES  7 

times  a  third  part  —  a  fixed  sum  to  cover  the  cost  per  customer  of 
expenses  peculiarly  proportional  only  to  the  number  of  customers. 
Sometimes  the  first  and  third  parts  are  combined;  where  demand 
cuts  no  figure  the  split  rate  reduces  to  a  simple  unit  charge.* 

While  the  multi-part  tariff  may  be  wholly  logical,  it  may  be  so 
complex  and  unintelligible  to  the  customer  that  he  cannot  check 
up  his  bill  by  any  instruments  on  his  premises  and  this  may  create 
a  fundamental  prejudice  against  the  utility.  Then  the  disad- 
vantages outweigh  the  benefits  of  the  schedule  in  most  cases. 

Twilight  Zones.  —  Many  rates  are  not  wholly  flat  nor  yet 
quite  like  logical  unit  charges;  for  instance,  take  the  postal  letter 
rates.  For  all  domestic  and  many  foreign  letters,  the  charge  is 
flat  with  respect  to  distance,  collection  and  delivery,  but  in  units 
so  far  as. weight  and  number  go.  For  newspapers,  the  only  unit 
basis  is  that  of  weight;  in  this  case  distance,  collection,  delivery 
and  number  of  separate  pieces  are  not  separately  considered  and 
to  that  extent  the  charge  is  a  flat  rate.  In  the  American  parcel- 
post  system,  recently  inaugurated,  a  much  more  definite  pro- 
portionment  is  made,  based  on  pieces,  weight  and  distance,  so  as 
to  be  practically  a  unit-tariff  plan.  Some  telephone  rates  at 
first  seem  like  flat  charges  —  being  frequently  so  many  dollars 
per  installation  per  year;  but  closer  inspection  shows  that  there 
is  a  differentiation  into  classes,  suclTas  residence,  commercial,  etc., 
and  further  into  single-party,  two-party,  etc.,  with  different 
charges  to  each  and  with  or  without  count  of  connections  actually 
completed  for  a  customer. 

Sliding  scales  —  so  much  for  the  first  thousand  cubic  feet  of 
gas  or  water  (for  example)  and  proportionately  less  for  succeeding 
thousands  —  are  unit  charges  with  a  device  attempting  to  bring 
the  price  automatically  close  to  the  cost  of  serving  large  and 
small  consumers. 

In  general,  it  may  be  stated  that  it  is  easier  to  test  the  adequacy 
of  service  and  the  reasonableness  of  rates  in  a  company  making  a 
storable  product  than  one  performing  a  service. 

*  Credit  for  these  schemes  should  go  first  to  Dr.  John  Hopkinson  who  for- 
mulated in  1892  the  demand  and  output  division  in  a  presidential  address  to 
the  Junior  Engineering  Society  (British).  Shortly  after  Mr.  Arthur  Wright 
produced  his  well-known  maximum-demand  indicator  and  further  developed 
the  demand-output  basis.  In  1900  Mr.  Henry  Doherty,  in  the  paper  "  Equi- 
table, Uniform  and  Competitive  Rates,"  before  the  National  Electric  Light 
Association  split  fixed  charges  into  demand  and  customer  factors. 


PUBLIC  UTILITY  RATES 


Gas 


Electricity 


Water 


Street  Railway 


ILLUSTRATIONS  OF  AMERICAN  UTILITY  RATE  CLASSIFICATIONS 

FLAT 

($0.25  per  lamp  per 
I     month. 

•$0.75  per  lamp  or 
motor  per  month 
or  year. 

:$1  per  fixture  or  per- 
son per  quarter. 
5c.     per     passenger 
.     trip. 

( Long  excursion  fares. 
Steam  Railway    |      Monthly  commu- 
l     tation  tickets. 
'  Various     sums     per 
outlet  or  per  per- 
son or  per  inch  of 
outlet. 

f $15  to  $200  per 
1     year. 

J  Various  sums  for 
I     leased  lines. 
2c.  per  oz.  for  let- 
ters, to  Ic.  per  Ib. 
for  newspapers. 


Sewerage 

Telephone 
Telegraph 

Postal  Service 


UNIT-CHARGE 

$0.70  to  $1.25  per  thousand  cubic 
feet. 

$0.05  to  $0.15  per  kilowatt  hour. 


$2.25  to  $5  per  thousand  cubic  feet. 

5c.  per  passenger  in  first  zone  plus 

2c.  per  added  zone. 
2|c.    per    passenger    mile    (mileage 

books,  trip  tickets). 


Per  thousand  gallons  or  cubic  feet 
discharged. 

12  to  5c.  per  local  call.    Various  toll 
J      charges  for  long  distances.* 
)  Tolls  based  on  number  of  words, 
J      distance  and  time  of  day.f 
Parcel-post  zone-weight  rates. 


Relative  Importance  of  Low  Rates.  —  The  expressions  of 
public-utility  officials  seem  to  indicate  that,  after  fair  convenience 
and  more  or  less  attractive  prices  have  been  established  for  the 
proffered  service,  complete  ability  and  readiness  to  serve  all  who 
apply  is  first  to  be  secured;  then  a  service  is  to  be  sought  that  will 
not  cause  complaint  as  to  regularity,  uniformity  or  reliability,  and 
finally  a  lower  rate  established. 

*  For  messages  between  New  York  and  Chicago,  a  distance  of  900  miles, 
the  message  charge  is  $5,  or  0.19c.  per  mile  per  minute.  An  average  of  the 
New  England  Telephone  &  Telegraph  Co.  tolls,  as  found  by  D.  C.  Jackson 
in  the  Massachusetts  Highway  Commission  studies,  was  1.6  to  0.65c.  per  mes- 
sage mile. 

t  The  telegraph  charge  for  ten  words  from  New  York  to  Chicago  in  1916 
was  50c.,  or  0.0066c.  per  word  mile.  The  similar  charge  from  New  York  to  San 
Francisco  is  $1,  or  O.OOSlc.  per  word  per  mile.  The  New  York-New  Orleans 
charge  is  60c.  or  0.0045c.  per  word  mile.  For  transmission  during  off-peak 
hours,  50  words  are  transmitted  for  the  same  price,  which  correspondingly 
reduces  the  word-mile  charges  to  $  those  quoted. 


RATES  AND  SERVICES  9 

What  constitutes  superior  service  beyond  the  essential  qualities 
of  adequacy  outlined?  Due  regard  for  the  preservation  and  en- 
hancement of  a  community's  external  attractiveness,  search  for 
especially  courteous  and  skillful  employees,  general  wide  use  of 
safety  precautions  and  devices  for  the  protection  of  the  public 
and  employees  —  such  are  about  all  that  can  be  named  without 
study  of  specific  cases.  A  closer  study  of  adequacy  is  not  at- 
tempted here,  as  such  discussions  turn  on  regulation  rather 
than  on  rates. 


CHAPTER  III 
VARIOUS  BASES  FOR  RATES 

Cost  of  Service  a  Necessary  Approach.  —  To  complete  any 
survey  of  the  justice  and  equity  in  a  scheme  of  rates,  the  prices 
charged  should  be  studied  in  their  relations  to  the  cost  of  the  serv- 
ice and  the  income  to  be  received.  The  deeper  the  probe,  the 
more  will  this  need  appear  —  in  spite  of  other  matters  that  exert 
a  profound  influence  (like  the  maximum  price  which  small  tele- 
phone users  can  afford  to  pay).  When  quality  of  service  regulates 
some  rates  to  certain  classes  of  customers,  as  in  telephone,  tele- 
graph, express  and  postal  utilities,  cost  of  service  at  least  is  a  base 
of  departure.  It  is  obvious  that  a  corporation  will  not  long  do 
business  if  cost  of  service  is  not  met  by  income;  the  reasonable- 
ness of  an  aggregation  of  tariffs  cannot  be  judged  until  the  rela- 
tions between  income,  expense,  profits,  dividends,  surplus,  etc., 
are  known. 

"  Cost  "  is  Replacing  "  Worth."  —  Time  was  when  innumer- 
able able  men  held  that  such  a  proposition  was  not  tenable  be- 
cause it  was  strange  and  because  it  seemed  to  be  an  attempt  to 
substitute  an  easy  plan  for  the  difficult  scheme  of  determining 
"what  a  service  was  worth."  It  seems  reasonable,  however^to 
assert  that  such  arguers  deny  the  possibility  of  growth  in  legal 
and  economic  thought,  even  if  the  proposition  were  strange. 
This  is  not  today  a  stranger  doctrine  than  history  shows  was  the 
one  of  1875  that  a  state  legislature  could  fix  maximum  utility 
rates  so  long  as  they  allowed  a  fair  return  on  the  value  of  the 
utility.  Yet,  since  the  celebrated  corner-stone  case  of  Munn  v. 
Illinois  (94  U.  S.,  113;  1876)  this  principle  has  been  unquestioned. 

Use  of  Cost  is  Not  New.  —  While  in  ordinary  private  trans- 
actions the  worth  of  a  service  has  depended  on  various  external 
influences,  yet,  when  a  large  part  of  the  public  has  been  affected, 
cost  has  been  a  large  measure  of  worth.  When  industrial  life 
was  more  simple  than  now  and  competition  more  free,  the  selling 
price  of  a  manufactured  product  and  the  production  cost  were 
nearly  parallel  year  after  year.  When  virtual  monopoly  developed, 

10 


VARIOUS  BASES  FOR  RATES  11 

the  manifest  desire  of  the  people  nevertheless  was  to  continue  the 
results  with  which  they  had  been  so  long  familiar,  i.e.,  they  de- 
sired some  assurance  that  production  cost  and  selling  price  would 
continue  to  be  parallel  and  separated  at  all  times  by  profits  no 
larger  than  obtained  in  other  lines  of  manufacturing  effort. 

Thus  the  reason  for  the  important  role  of  cost  of  service  in 
public-utility  rates  far  antedates  the  utilities  as  now  organized 
and  is  but  one  expression  of  a  general  treatment  to  be  expected 
for  monopolistic  business.  It  is  apparent  then  that  even  when 
it  is  attempted  to  apply  "  value-of-service "  as  the  fundamental 
process  of  judgment  (taking  a  well-known  definition*  of  "value  of 
service"  as  the  "amount  which  a  user  would  have  to  pay  for  the 
same  or  equivalent  service  under  fair  but  not  destructive  competi- 
tion"), it  is  not  possible  to  cut  loose  from  "  cost-of -service. " 

An  Unsound  Basis.  —  A  basis  of  rates,  which  once  existed 
more  broadly  than  now  and  one  which  is  probably  the  oldest  and 
possibly  the  simplest  to  follow,  is  often  stated  as  "charging  all 
the  traffic  will  stand."  Most  rates  which  result  from  this  plan 
are  perhaps  to  be  regarded  as  the  outcome  of  a  bargain,  and  in 
these  cases  they  have  probably  been  fixed  blindly  without  con- 
sidering what  profits,  or  losses,  might  properly  be  assumed.  Such 
a  course,  taken  as  the  fundamental  procedure  of  a  true  public 
utility,  is  not  now  regarded  as  generally  fair  to  the  consumer  or 
to  the  utility  concern;  and  sometimes  it  is  in  opposition  to  a  wise 
public  policy.  It  belonged,  indeed,  to  the  pioneer  days  when  a 
given  service  was  not  a  public  necessity  or  even  a  convenience, 
and  hence  not  subject  to  more  public  regulation  than  that  afforded 
by  common  barter  or  by  refusal  to  trade.  (As  a  subordinate  idea, 
however,  it  has  still  a  certain  important  but  restricted  application 
as  noted  later.) 

A  Fair  Basis.  —  A  basis  of  rates  for  real  public  service  now 
acknowledged  to  be  generally  equitable  is  one  by  which  the 
legitimate  expenses,  and  reasonable  profits,  are  fairly  distributed 
upon  the  total  service  or  product  given.  This  idea  of  a  proper 
basis  of  rates  is  gaining  wider  recognition  constantly.  How  this 
basis  is  to  be  secured  may  be  seen  in  the  trend  of  judicial  and  com- 
mission opinions,  based  on  the  constitutional  principle  that  prop- 
erty cannot  be  taken  without  due  process  of  law  and  on  the 

*  Rate  Research  Committee,  National  Electric  Light  Association,  1914 
Report. 


12  PUBLIC  UTILITY  RATES 

concept  (given  in  1885  by  R.  R.  Commission  Cases,  116  U.  S.  307, 
331;  and  in  1888  by  Reagan  v.  Farmers  Loan  and  Trust  Co.,  154 
U.  S.,  362,  399)  that  a  rate  imposed  on  a  concern  by  public 
mandate  must  permit  a  common  profit  in  order  not  to  be  con- 
fiscatory.  The  oft  quoted  decision  of  the  U.  S.  Supreme  Court  in 
Smyth  v.  Ames  (169  U.  S.,  466)  early  outlined  the  idea  applied  to 
a  railroad  case.  It  is  stated  there: 

We  hold,  however,  that  the  basis  of  all  calculations  as  to  the  reason- 
ableness of  rates  to  be  charged  by  a  corporation  maintaining  a  highway 
under  legislative  sanction  must  be  the  fair  value  of  the  property  being 
used  by  it  for  the  convenience  of  the  public.  And,  in  order  to  ascertain 
that  value,  the  original  cost  of  construction,  the  amount  expended  in 
permanent  improvements,  the  amount  and  market  value  of  its  bonds 
and  stocks,  the  present  as  compared  with  the  original  cost  of  construction, 
the  probable  earning  capacity  of  the  property  under  particular  rates 
prescribed  by  statute,  and  the  sum  required  to  meet  operating  expenses 
are  all  matters  for  consideration,  and  are  to  be  given  such  weight  as  may 
be  just  and  right  in  each  case.  We  do  not  say  that  there  may  not  be 
other  matters  to  be  regarded  in  estimating  the  value  of  the  property. 

Courts  do  not  Fix  Reasonableness.  —  It  must  be  remembered, 
however,  that  neither  legislation  nor  judicial  opinion  have  yet 
made  much  closer  determination  of  the  relative  importance  or 
fixed  the  application  of  the  elements  which  the  Supreme  Court,  in 
the  above  case,  held  should  be  more  or  less  influential.  One  can- 
not expect  that  courts  will  become  very  explicit  as  to  what  might 
be  reasonable.  It  is  the  court's  function  to  determine  only  if 
rate  systems  in  specific  cases  are  unreasonable  and  confiscatory, 
or  perhaps  on  the  other  hand  extortionate.  It  is  the  function  of 
the  legislatures  and  their  agents,  the  commissions  and  municipal- 
ities, to  find  and  prescribe  the  reasonable  figures. 

Moreover,  such  remarks  as  above  quoted,  found  in  typical  court 
decisions,  are  only  statements  of  an  end  to  be  sought.  Such  broad 
ideas,  applied  without  qualifications,  might  be  fair  to  the  com- 
pany in  final  result,  especially  as  to  protection  of  property  rights, 
but  still  work  injustice  to  a  large  percentage  of  the  consumers 
through  not  charging  individuals  even  roughly  in  accordance 
with  the  cost  of  serving  them.  How  may  the  same  result  be 
secured  to  the  company  with  substantial  justice  and  approximate 
fairness  in  apportioning  each  consumer's  burden?  That  is  not  to 
be  answered  easily  or  quickly  in  an  offhand  way,  and  the  complete 
answer  must  remain  as  the  object  of  all  the  studies  which  follow. 


VARIOUS  BASES  FOR  RATES  13 

Need  of  Classifying  Customers.  —  Ideas  must  differ  as  to- 
what  (speaking  only  of  rates)  constitutes  "substantial  justice" 
and  "approximate  fairness."  It  seems  reasonable  to  consider 
those  secured  if  a  customer  receives  a  rate  that  would  be  fair 
to  the  average  customer  of  a  class  having  wants  similar  to  his. 
It  may  be  assumed  here  as  axiomatic  that  the  unit  cost  of  serving 
each  customer  will  vary  somewhat  from  that  for  all  others,  de- 
pending somewhat  on  the  size  of  his  demand  for  service,  on  his 
distance  from  service  centers,  on  the  times  of  service  relative  to 
the  demand  of  other  customers,  etc.,  etc.  The  bearing  of  these 
affecting  conditions  will  appear  again  later.  It  is  generally  mani- 
festly unfair  to  compel  a  public-utility  concern  to  compute  a 
different  basic  rate  for  each  small  individual,  or  every  time  a  bill 
has  to  be  rendered.  But  that  is  what  is  sometimes  seen,  in  effect, 
where  a  company  adopts  a  multi-part  tariff  scheme  where  the 
change  to  any  customer  has  different  demand,  service  quantity 
and  customer  factors  which  vary  from  month  to  month.  Con- 
cerns adopting  such  complicated  schedules  would  perhaps  com- 
plain if  forced  to  adopt  them  by  public  service  commissions. 
Moreover,  with  the  difficulty  of  a  customer's  checking  the  charges, 
opportunity  might  here  be  seized  by  employees  for  petty  harassment 
and  discrimination.  Common  public  knowledge  of  the  basis  for 
prices  would  become  difficult  and  unreliable.  Confidence  in  the 
existence  of  an  equitable  basis  of  computing  charges  would  di- 
minish. 

It  is  general  experience  that  the  business  of  most  utilities  may 
be  gathered  into  a  few  classes  wherein  the  maximum  and  minimum 
costs  of  unit  service  (cubic  feet  of  gas  or  water,  kilowatt-hours, 
local  telephone  calls,  etc.)  vary  but  little  from  the  average. 

Classes  Promote  Simplicity.  —  This  is  fortunate,  for  simplic- 
ity in  the  rate  system  is  usually  a  greater  public  benefit  than  per- 
fect adherence  to  wholly  logical  or  completely  accurate  individual 
rates.  Moreover  the  ideal  individual  rates  need  not  seriously 
differ  from  the  practical  class  rates  if  the  classifications  are  well 
drawn.  In  very  many  cases,  the  natural  commercial  separations 
are  sufficient.  For  instance,  it  has  been  shown  that  cost  of 
electricity  supply  often  changes  greatly  with  the  size  of  a  cus- 
tomer's load.  Here  individual  rates  become  possible  for  very 
heavy  consumers  and  .perhaps  segregation  of  the  various  smaller 
users  between  certain  load  limits,  as  0  to  50  kw.-hr.  per  month, 


14  PUBLIC  UTILITY  RATES 

51  to  500  kw.-hr.,  501  to  1000  kw.-hr.,  1001  to  3000  kw.-hr.,  etc., 
sufficient  to  secure  the  "approximate  fairness"  and  "substantial 
justice"  mentioned. 

Such  class  separation  may  exist  but  be  indirect  and  even  un- 
recognized, as  by  the  use  of  discounts  which  increase  in  proportion 
to  the  size  of  the  customer's  bill,  or  sliding  scales  of  diminishing 
prices. 

Each  classification  needs  to  be  closely  scrutinized  by  managers 
and  regulators  alike  to  avoid  if  possible  large  groups  of  customers 
in  each  size  class  falling  close  to  the  limits  with  few  between  for 
then  some  may  be  unduly  favored  or  unjustly  burdened.  The 
most  desirable  adjustment  of  size-class  limits  results  when  cus- 
tomers are  generally  scattered  between,  bunching,  if  at  all,  not 
far  from  the  mid-point. 

Off-peak  Classes.  —  A  customer  classification  which  greatly 
affects  cost  is  according  to  the  time  of  service,  or  supply,  relative 
to  the  maximum  daily  or  seasonal  demand  on  the  utility  company. 
This  affecting  condition  is  most  pronounced  in  the  cases  of  service 
rendered  rather  than  storable  product  supplied.  For  instance,  the 
capacity  of  generating  machinery  to  be  installed  in  a  central 
electric  station  is  fixed  generally  by  the  maximum  demand  which 
exists  for  a  short  time  only  once  in  one  day.  Investment  charges 
may  then  be  apportioned  more  or  less  according  to  the  demand 
which  the  various  customers  exhibit  at  the  time  of  maximum  plant 
load.  Customers  whose  maximum  demand  comes  at  the  time  of 
smallest  station  output  may  come  into  special  classes  or  sub- 
classes and  may  justly  receive  rates  which  include  little  or  no 
charge  for  investment  in  generating  equipment. 

This  evidently  has  long  been  recognized  by  the  Massachusetts 
Board  of  Gas  and  Electric  Light  Commissioners,  one  of  the  earliest 
and  most  far  sighted  utility  commissions,  though  its  opinions 
discussing  this  point  do  not  directly  take  up  investment.  Thus 
in  the  1908  petition  case  of  the  Public  Franchise  League  relative 
to  the  Boston  Edison  Electric  Illuminating  Co.  (24th  Ann.  Rep., 
Jan.,  1909)  the  Board  stated: 

In  distinction  from  the  large  body  of  customers  just  mentioned  [de- 
pendent and  non-contract]  there  is  a  considerable  number,  both  actual 
and  possible,  who  may  readily  supply  themselves  .  .  .  from  some  other 
source.  To  such  customers  the  value  of  the  service  furnished  by  the 
company  wiH  probably  depend  to  a  considerable  extent  on  the  probable 


VARIOUS  BASES  FOR  RATES  15 

cost  of  supplying  themselves.  If  the  company  is  to  supply  them,  it  is 
subject  to  the  ordinary  rules  of  business  competition  —  it  must  meet 
prices  established  by  conditions  which  it  did  not  create  and  cannot  con- 
trol, or  not  do  the  business.  .  .  . 

In  reaching  out  for  additional  business  by  making  concessions  from 
the  average  rate,  it  is  plain  that  the  only  justification  for  the  continuance 
of  such  a  policy  is  that  this  additional  business  will  be  for  the  benefit  of 
the  large  body  of  customers  who  must  pay  the  regular  rate.  ...  In 
fact,  the  only  means  by  which  the  average  lighting  customer  can  hope  to 
see  the  price  to  him  materially  reduced  is  through  a  greater  increase  in 
the  volume  of  business  relative  to  the  company's  investment.  Long  use 
of  a  customer's  installation,  especially  during  parts  of  the  day  or  year 
when  otherwise  a  considerable  proportion  of  the  company's  plant  is 
standing  idle,  even  at  very  low  rates,  provided  they  reasonably  exceed 
proper  "running  costs"  may  yield  a  revenue  otherwise  not  available, 
which  will  materially  help  to  dilute  the  company's  general  expenses. 

This  has  been  re-affirmed  in  various  more  recent  cases. 

The  history  of  a  given  utility,  the  industrial  situation  and  va- 
rious other  local  factors  necessarily  enter  any  opinion  as  to  the 
extent  to  which  special  classes  of  customers  may  participate  in 
investment-charge  burdens. 

Individual  Diversity  Factors.  —  Participation  in  investment 
charges  may  sometimes  be  made  after  a  study  of  the  individual 
diversity  factors  of  various  customers  or  subdivisions  of  an  utility 
system.  This  idea  has  been  developed  for  electric  central-station 
conditions*  and  can  be  extended  to  other  fields.  The  cost  of  gas 
and  water-supply  is  much  less  affected  by  the  time  of  a  customer's 
demand  (for  the  stored  product)  than  is  electricity. 

"Group  Diversity  Factor"  for  such  a  study  has  been  defined  as 
"the  ratio  of  the  sum  of  the  maximum  power  demands  of  any 
system  or  part  of  a  system  to  the  maximum  demand  of  the  whole 
system  or  a  part  under  consideration."  "Individual  Diversity 
Factor"  then  becomes  "the  ratio  of  the  maximum  power  demand 
made  by  any  subdivision  of  a  system  to  the  coincident  demand 
made  by  such  subdivision  at  the  hour  of  the  maximum  load  upon 
the  source  of  supply." 

Strict  Equity  versus  General  Welfare.  —  It  will  not  do  to  be 
dogmatic  in  saying  on  what  fundamental  basis  new  rates  always 

are  or  are  not  to  be  built  up  or  old  ones  scrutinized.     For  instance, 

/ 

*  "  Application  of  Diversity  Factor, "  H.  B.  Gear,  National  Electric  Light 
Assoc.,  June,  1915. 


16  PUBLIC  UTILITY  RATES 

it  will  not  do  even  always  to  deny  that  the  traffic  is  to  be  "charged 
all  that  it  will  stand"  —if  we  dissociate  from  that  phrase  its 
sinister  intimation  of  gentle  highway  robbery.  A  certain  service 
or  product  may  be  very  desirable  for  a  given  community  and  very 
few  persons  therein  may  be  able  to  meet  the  cost  that  should  fall 
on  them.  For  the  sake  of  having  the  convenience,  some  few  may 
be  willing  and  economically  able  to  stand  for  more  than  their 
proper  charge  based  on  proportionate  cost  of  service.  Then,  an 
"overcharge"  to  some,  and  as  great  as  they  would  consent  to,  in 
connection  with  an  "undercharge"  (below  the  proportionate  cost 
of  service)  to  others,  might  be  made  to  yield  an  income  which 
would  cover  expenses  and  profit  and  justify  the  undertaking. 
The  whole  community  would  then  be  a  gainer.  Extortion  may 
be  guarded  against  for,  with  public  supervision,  it  can  be  seen 
whether  total  operating  income  covers  reasonable  investment 
charges  and  still  yields  the  concern  enough  for  a  proper  reward 
or  more  than  enough  to  attract  needed  capital. 

For  a  specific  example  illustrating  the  point  fairly  well,  we 
may  take  a  telephone  exchange  in  a  small  community.  To  a  few 
'it  is  evidently  a  real  necessity;  to  the  multitude  it  could  be  a 
great  economizer  of  effort  and  time,  but  a  luxury  and  even  an 
extravagance  if  the  charge  equaled  the  cost.  By  charging  those 
who  most  needed  and  most  valued  the  telephone  service,  all  they 
would  stand,  the  service  might  be  brought  within  reach  of  all 
and  the  business  raised  to  a  size  worth  the  attention  of  men 
skilled  in  the  industry. 

Such  a  course  in  this  one  case  perhaps  also  might  be  justified 
as  following  closely  the  real  value  and  cost.  The  worth  of  tele- 
phone service  increases  in  proportion  to  the  total  number  of  per- 
sons which  a  subscriber  may  call  or  be  called  by.  This  advantage 
of  a  very  large  list  of  subscribers  is  of  greatest  value  to  the  already 
heavy  user  of  a  limited  list  like  the  merchant  and  of  much  less 
value  to  the  average  householder,  who  normally  reaches  the  same 
few  tradesmen  and  friends.  In  such  a  case  the  real  individual 
cost  of  some  subscribers  might  be  considered  to  include  a  part  of 
the  book  cost  of  others  —  the  cost  of  having  some  one  to  call. 

A  similar  condition  exists  in  the  postal  service  today.  It  is 
known  that  the  expenses  of  collecting,  assorting,  transporting  and 
delivering  the  several  classes  of  mail  matter  are  not  at  all  evenly 
distributed.  A  logical  basis  of  comparing  class  costs  is  not  in 


VARIOUS  BASES  FOR  RATES  17 

use  and  some  shifting  of  the  burden  from  letter-rate  matter  prob- 
ably would  be  seen  dictated  if  such  a  logical  basis  were  operative. 
At  the  same  time,  it  is  possible  that  were  the  newspapers  and 
magazines  to  bear  their  full  proportion  of  cost,  then  their  distri- 
bution would  be  so  restricted  that  there  would  be  a  consequent 
marked  decrease  in  first-class  matter  —  fewer  letters  being  drawn 
out  by  advertisements,  etc.  Moreover,  the  transmission  of  in- 
telligence and  the  spread  of  intellectual  enjoyment  might  be  so 
appreciably  impaired  in  rural  districts  that  the  best  development 
of  the  country  would  be  hindered.  If  that  result  is  expected,  the 
country  at  large  can  fairly  contribute  to  prevent  it  through  slightly 
excessive  first-class  rates. 


CHAPTER  IV 

DETAILS   OF  THE  COST-OF-SERVICE   STUDY   OF 

RATES;    TEST  FOR  FIXED  AND 

OPERATING  CHARGES 

Test  Schedules.  —  A  good  approach  to  the  study  of  a  con- 
cern's existing  rates  or  the  logical  formulation  of  new  ones  is  to 
build  up  independent  or  tentative  schedules  based  on  cost  of 
service  for  various  classes. 

General  Cost  of  Service.  —  It  is  necessary  first  to  arrive  at 
some  knowledge  of  all  the  true  annual  expenses  in  giving  the  serv- 
ice as  a  whole  (exclusive  of  return  on  capitalization,  investment 
or  value  of  property  used).  This  true  operating  cost,  of  course, 
subtracted  from  the  earnings  of  the  service  in  question  should 
establish  the  lump  sum  of  net  earnings  and  leads  to  the  computa- 
tion of  the  percentage  return  on  value  of  plant,  etc.,  for  the  par- 
ticular service.  (Discrepancies  in  true  net  earnings  from  the 
figures  of  official  reports  will  often  arise  even  if  the  proposed 
schedule  of  true  annual  costs  is  very  carefully  built  up  since 
some  items  of  true  cost  are  often  neglected.  They  may  not  always 
be  "expense,"  —in  that  they  never  have  been  paid  out  of  cash, 
but  they  then  represent  value  lost  from  the  property  investment 
and  not  compensated  for  by  funds  laid  aside  from  earnings.) 

Preliminary  Survey  of  Profits.  —  If  the  computed  rate  of  net 
earnings  on  value,  investment  or  capitalization,  as  the  case  may 
warrant,  is  judged  to  be  too  low  (the  basis  of  opinion  as  to  what 
constitutes  a  "fair  return"  is  discussed  later),  then  the  conclusion 
may  frequently  be  drawn  that  the  existing  rate  schedule  is  unfair 
to  the  utility  company  at  some  point.  However,  before  the  opin- 
ion is  further  crystallized,  close  detailed  scrutiny  of  the  entire 
organization,  equipment  and  daily  activity  of  the  concern  may  be 
necessary  to  see  if  the  deficiency  can  arise  from  corporate  or  per- 
sonal inefficiency,  from  plant  troubles  like  excessive  leaks  or  losses, 
from  too  many  bad  accounts,  insufficient  or  undistributed  load, 
poor  detail  management,  etc.,  etc. 

18 


COST-OF-SERVICE  STUDY  OF  RATES  19 

If  the  possibility  is  not  disclosed  of  sufficient  improvement  to 
seem  apt  to  raise  the  reduced  profits,  then  it  may  be  well  carefully 
to  look  over  the  existing  rate  schedules.  If  at  some  point  they 
are  manifestly  far  below  the  rates  seen  in  a  number  of  plants 
under  an  approach  to  similar  conditions,  then  the  impression  of 
rates  unfair  to  the  company  is  much  strengthened  Existence  of 
compensating  lower  figures  of  expenses,  due  to  local  causes,  are 
to  be  sought  out.  If  the  deficiency  really  comes  from  an  unfair 
rate  schedule,  the  conclusion  is  unescapable  that  the  rates  some- 
where must  be  advanced.  If  the  trouble  is  internal  rather  than 
external,  the  plant  load  must  be  improved  or  new  economies 
found. 

If  the  overall  rate  of  net  earnings  is  larger  than  those  which  are 
just  necessary  to  attract  fresh  capital,  and  in  the  absence  of 
cause  for  certain  special  rewards,  discussed  later,  the  common 
presumption  is  that  the  rate  schedule  somewhere  is  unreasonably 
heavy.  Sometimes  the  presumption  cannot  be  sustained,  but 
the  circumstance  warrants  study.  The  gross  earnings  of  a  com- 
pany, for  instance,  may  include  income  not  at  all  from  the  public 
service,  or  income  from  traffic  developed  by  the  unusual  activity 
of  the  officials  in  fields  where  a  demand  for  services  of  the  utility 
concern  did  not  previously  exist  and  where  good  earnings  may  be 
secured  with  prices  not  based  at  all  on  cost  of  service.  The  same 
close  scrutiny  of  organization,  equipment  and  activity,  as  noted 
already,  still  may  well  be  made,  for  possibly  no  condition  is  more 
conducive  to  perpetuation  of  bad  accounts,  loose  engineering  and 
general  inefficiency  than  the  rarity,  "easy  money."  Such  a 
scrutiny  may  disclose  definite  sums  which  can  be  saved  and  in 
justice  to  the  public,  these  are  to  be  taken  from  the  actual  annual 
costs  to  arrive  at  proper  figures. 

True-cost  Schedule.  —  The  following  schedule  of  a  concern's 
annual  service  costs  (not  necessarily  annual  "expenses"  under 
some  managers'  understanding  of  that  term)  is  perhaps  useful 
for  examination  at  this  point.  These  figures  are  easily  found  if 
the  utility  is  keeping  its  accounts  according  to  prescribed  stand- 
ards of  most  regulating  commissions. 

1  —  Return  on  value  of  physical  plant  and  allowed  intangible  elements.* 

*  This  item  is  grouped  here  though  when  it  is  desired  to  test  the  percentage 
of  net  earnings  on  valuation  or  capitalization,  it  is  to  be  excluded  from  the 
sum  of  expenses.  Moreover,  this  item  is  capable  of  division  into  bond  inter- 


20  PUBLIC  UTILITY  RATES 

2  —  Rentals  on  leased  properties.* 

3  —  Annual  allowances  to  recover  for  "  depreciation"  and  "  obsolescence." 

4  —  Annual  appropriation  for  amortization  of  investment  in  intangible 

property. 

5  —  Taxes  or  equivalent,  fire-,  accident-  and  liability-insurance  premiums. 

6  —  Annual  appropriations  for  surplus  funds  to  secure  bond  interest  and 

dividends  in  lean  years  or  for  extreme  contingencies. 

7  —  Salaries  of  administrative  officers  and  clerks. 

8  —  Expenses  of  general  offices,  etc. 

9  —  Engineering  department  expense. 

10  —  Annual  appropriations  for  hospital  subsidies,  welfare  work,  charities,  etc. 

11  —  Advertising;  new-business  getting. 

12  —  Interest  on  working  capital  required. 

13  —  Bad  accounts,  etc. 

14  —  Meter  reading,  accounting,  billing  and  collecting  costs. 

15  —  Labor  in  service  or  upon  plant. 

16  —  Supplies  for  service  or  plant. 

18  —  Repairs  —  distinct  from  depreciation. 

19  —  Losses  between  plant  and  customer. 

Nothing  is  allowed  for  extensions  to  plant,  for  this  item,  in  the 
great  majority  of  cases,  means  fresh  capital.  The  conditions 
which  warrant  reporting  some  part  of  the  first  cost  of  extensions 
as  annual  service  costs,  are  so  peculiar  and  are  seen  so  rarely  that 
their  insertion  is  a  special  matter  to  be  justified  by  special  evidence 
to  that  end.  This  schedule  is  not  the  only  arrangement  that  could 
be  made  and  re-assignment  of  items  is  permissible.  Further  than 
already  noted,  these  items  are  self-explanatory  to  a  considerable 
extent,  although  various  questions  rise  as  to  their  determination 
and  bearing;  discussions  of  these  points  appear  later. 

If  there  is  subtracted  from  the  lumped  gross  earnings,  the  cost 
of  service  aggregated  without  Item  1  (and  perhaps  Item  6),  then 
the  remainder  may  be  considered  the  lump  net  return.  This, 
divided  by  the  allowed  valuation  of  the  property,  gives  us  the  per- 
centage return.  It  should  be  here  particularly  noted  that  Item  1, 
"return  on  value  of  plant,"  ought  to  work  out  to  be  such  a  per- 
centage on  combined  bonds  and  stocks  as  will  attract  capital,  or 

est  and  dividends.  Presumably,  the  bonds  will  not  exceed  bare  physical  prop- 
erty value,  but  the  stock  capitalization  may  bear  no  relation  to  the  physical 
value  less  bonded  and  net  floating  debt. 

*  Rentals  need  to  be  studied  to  see  that  undue  parts  of  any  earnings  are 
not  being  by-passed  as  rentals.  The  rented  property  ought  not  to  be  expected 
ordinarily  to  return  more  than  say  10  to  20%  net  of  actual  value  —  as  local 
conditions  may  disclose  to  be  a  proper  rental  change. 


COST-OF-SERVICE  STUDY  OF  RATES  21 

include  all  additions,  above  ordinary  interest,  for  the  risk  of  the 
business,  special  rewards,  etc. 

The  Problem  of  Apportioning  Costs  on  Customers.  —  Sup- 
posing, that  we  have  reached  the  actual  figures  for  true  cost  of 
service  and  income,  and  know  the  segregation  of  expenses  accord- 
ing to  such  items  as  hi  the  foregoing  schedule,  and  have  ample  infor- 
mation about  customers'  load  characteristics,  then  in  the  majority 
of  cases  we  can  go  a  long  step  beyond  the  lump-sum  and  per- 
centage returns,  and  study  the  rates  which  should  place  on  the 
ultimate  consumers,  the  approximate  costs  of  their  respective 
services. 

In  apportioning  expenses  among  the  customers,  it  is  almost 
obvious  that  a  mere  equal  division  of  all  expense  and  profit  ac- 
cording to  their  number  or  to  their  maximum  load,  or  to  aggre- 
gate of  service  alone  may  not  be  fair. 

At  first  glance,  it  may  seem  almost  hopeless  to  attempt  a  logical 
apportionment  of  the  items  given.  Indeed,  the  whole  task  of 
studying  fairness  of  rates  seems  stupendous  and  hopeless  in  its 
entirety;  but,  like  most  other  intricate  problems  when  attacked 
step  by  step  with  engineering  methods,  it  unfolds  itself  and  loses 
its  air  of  complexity  and  impenetrability. 

It  has  been  seen  that  the  expenses  fall  into  two  classes  (1) 
"fixed"  —  generally  those  continuing  whether  the  plant  is  run- 
ning or  not,  and  (2)  "operating"  —mostly  those  which  stop 
when  service  stops.  For  a  complete  analysis,  it  is  well  to  further 
split  up  the  first  group  into-  (a)  fixed  charges  which  actually  do 
not  vary  with  any  fluctuations  of  business,  and  (6)  customer 
costs  which  vary  directly  with  the  number  of  customers  and  which 
would  disappear  entirely  with  the  complete  loss  of  business. 

A  Test  for  Fixed  Charges.  —  For  the  logical  segregation  of 
expense  items,  a  simple  test  is  available  and  that  is  to  ask  such 
questions  as  these:  "Is  this  item  most  concerned  with  providing 
physical  property?"  (If  so,  it  is  a  true  fixed  charge.)  "Is  this 
closest  related  to  mere  maintenance  of  corporate  functions?" 
(If  so,  it  usually  is  an  operating  expense,  unless  there  are  peculiar 
circumstances.)  "Is  this  item  dependent  on  actual  daily  amount 
of  service  furnished  or  accepted?"  (If  so,  it  is  clearly  a  true 
operating  expense.)  "Is  this  expense  caused  by  dealings  with 
customers  as  individuals?"  (Then  it  is  a  customer  or  "semi- 
fixed" charge.) 


22  PUBLIC  UTILITY  RATES 

The  common  and  generally  acceptable  sequel  of  such  tests,  as 
noted  later,  is  to  apportion  rental,  appropriation  for  obsolescence 
reserves,  taxes  and  fire  insurance,  a  small  part  of  appropriations 
for  amortization,  parts  of  salaries  of  administration  officers  and 
part  of  general  office  expenses,  upon  the  customers  according  to 
their  proportion  of  peak-load  demands.  (On  account  of  the 
diversity  of  the  individual  demands,  which  usually  do  not  quite 
coincide  with  each  other,  each  customer's  share  or  peak  load 
ordinarily  is  less  than  his  own  small  peak.) 

This  apportionment  is  secured  more  typically  in  service  utilities 
than  in  concerns  which  distribute  a  product  like  gas  or  water 
from  cheap  and  easy  storage.  The  argument  for  this  test  and 
distribution  of  fixed-cost  items  is  that  the  actual  equipment 
needed  is  fixed  by  the  reserve  necessary  to  meet  the  experienced 
coincident  demands  for  service  of  those  customers  who  cause  the 
peak  loads.  Taxes,  rentals,  and  allied  outlays  clearly  are  fixed 
by  the  amount  of  property  needed  for  the  business  (the  "load"). 
It  perhaps  is  not  so  obvious,  but  it  is  seen  on  second  thought,  that 
part  of  the  appropriations  to  surplus  and  for  amortization  of 
intangible  purchases,  parts  of  the  salaries  of  administrative 
officers,  and  of  the  general  office  expense,  etc.,  can  be  considered 
necessary  to  protect  the  integrity  of  such  physical  property  (aside 
from  wear),  and  so  are  to  be  borne  by  those  who  require  equipment 
held  in  reserve.  Peculiarities  of  electric-railway  service  need  spe- 
cial application  of  this  apportionment  —  as  noted  in  Chapter  XI. 

In  the  case  of  those  utilities  handling  a  product  out  of  storage, 
the  manufacturing  or  generating  equipment  may  be  of  small  size 
but  working  very  steadily;  then  the  annual  cost  of  such  equip- 
ment may  be  assessed  in  proportion  to  total  product  irrespective 
of  peaks,  etc.  But  the  storage  plant,  at  first,  might  seem  to  be 
partly  fixed  by  the  peak  loads  or  demands.  Yet  careful  thought 
shows  two  things;  (1)  approximately,  the  total  product  enters 
the  storage  plant  for  a  greater  or  lesser  length  of  time,  (2)  the 
size  of  storage  facilities  is  more  or  less  proportioned  to  the  total 
product  to  be  delivered  over  the  period  of  a  short  operating  cycle 
and  is  very  little  affected  by  the  rate  of  delivery  (a  high  rate'means 
a  peak  demand).  So  then  this  class  of  utilities  may  often  properly 
assess  all  items  except  No.  13  and  parts  of  Nos.  6  and  7,  on  the 
basis  of  total  product  supplied.  Gas  and  water  mains  have  to  be 
designed  to  carry  peak  flow,  and  so  may  have  a  certain  part 


COST-OF-SERVICE  STUDY  OF  HATES  23 

of  investment  considered  as  reserve  property  and  apportioned 
according  to  peak  demand. 

The  result  of  a  peak-load  apportionment  of  fixed  charges  is 
that  one  or  a  few  classes  of  customers  may  carry  nearly  all  the 
investment  charges  since  they  cause  practically  all  the  maximum 
demand.  Local  conditions  may  fix  the  most  desirable  solutions  in 
specific  cases  —  remembering  only  that  the  peak  customers  get  an 
indirect  benefit  from  the  development  of  off-peak  business.  Such 
benefits  arise  from  the  purchase  of  supplies  in  larger  quantities, 
shorter  life  of  equipment  with  less  liability  of  heavy  obsolescence, 
quicker  installation  of  improved  equipment  by  a  broader  distri- 
bution of  depreciation  charges,  greater  chance  of  reduced  rates 
by  reduction  of  operating  expense  through  apportioning  some 
items,  like  labor,  over  more  units  of  service  or  product,  benefits 
of  higher-grade  officials,  employees  and  consultants  attracted 
by  the  concern  with  the  larger  business. 

Apportionment  of  Taxes.  —  Taxes  and  the  various  insurance 
premiums  appear  at  first  to  be  wholly  concerned  with  the  integrity 
of  the  property  and  hence  fixed  charges  to  be  apportioned  to  the 
use  of  peak  load  capacity.  However,  further  study  shows  that 
taxes  (being  contributions  to  the  support  of  organized  government 
with  its  fire  and  police  protection,  monetary  system,  etc.)  may  be 
considered  a  cost  of  maintenance  of  business  as  well  —  and  hence 
to  be  sometimes  in  greater  or  less  part  distributed  over  all  service 
rendered  or  product  supplied.  Local  conditions  may  exert  a 
profound  influence  on  the  proper  apportionment  of  taxes. 

Apportionment  of  Depreciation  Expense.  —  Questions  of  "  de- 
preciation" are  perhaps  the  greatest  stumbling  blocks  in  all  rate 
discussions.  Moreover,  so  involved  is  this  subject  in  a  maze  of 
differing  definitions  that  the  terms  employed,  even  when  at- 
tempted to  be  used  quite  technically,  convey  different  ideas  to 
different  persons.  Therefore  a  later  section  has  been  devoted 
to  a  discussion  of  these  difficult  matters,  and  passing  mention  is 
made  here  only  of  the  apportionment  of  current  expense  burdens 
commonly  called  "depreciation." 

Modern  practice  is  to  pay  for  the  annual  deterioration  or  pro- 
vide retirement-liability  insurance  by  definite  contributions  from 
the  rates  intended  to  repay  the  actual  cost  of  each  item  of  property 
by  the  time  it  has  to  be  retired. 

Theoretically,  it  would  be  expected  that  the  annual  deterio- 


24  PUBLIC  UTILITY  RATES 

ration  due  alone  to  the  year's  unrepairable  wear  and  tear  (inde- 
pendent of  any  impairment  of  value  due  ttf  antiquation  through 
industrial  advance)  should  have  its  repayment  apportioned  like 
fuel  and  operating  labor  —  since  it  increases  with  the  hours  of  use. 

Theoretically,  compensation  for  obsoletion  and  antiquation, 
when  there  is  any,  should  be  apportioned  like  interest  —  for  obsole- 
tion is  a  liability  of  change  which  is  independent  of  the  hours  of 
service,  heavy  loads,  etc.,  being  only  an  expected  impairment  of 
the  value  of  physical  property. 

Where  wear-deterioration  is  the  controlling  phenomenon  in 
limiting  the  life  of  apparatus,  theory  justifies  apportioning  the 
annual  repayment  burden  entirely  along  with  the  operating  ex- 
penses. Where,  on  the  other  hand,  obsoletion  and  antiquation 
control  the  length  of  useful  life,  the  entire  annual  insurance  pay- 
ment against  these  contingencies  may  enter  the  fixed  charges. 

In  many  practical  situations,  as  in  the  case  of  product-storing 
utilities,  it  makes  little  or  no  difference  which  way  the  apportion- 
ment is  regarded  —  since  both  operating  and  fixed  charges  are 
levied  alike  on  quantity  units.  As  a  matter  of  commercial  ex- 
pediency in  some  cases  of  service-type  utilities  where  either  wear- 
deterioration  or  obsoletion  may  predominate,  it  may  be  advisable 
to  distribute  the  annual  burdens  on  the  various  customers  accord- 
ing to  their  respective  responsibility  for  the  deterioration  and  the 
obsoletion.  This  division  can  be  made  fairly  logical;  but  so  far 
it  has  been  more  often  arbitrary  —  perhaps  through  disregard 
of  the  principles  underlying  payment  for  depreciation. 

Depreciation  Expense  as  an  Operating  Cost.  —  In  the  actual 
practice  of  rate  making,  the  assumptions  as  to  expectation  of 
equipment  life  (considering  either  deterioration  or  obsoletion)  and 
the  various  approximations  necessary  (all  of  which  crudities  affect 
the  annual  "depreciation"  burden)  have  given  rise  to  the  practice 
of  treating  all  such  expense  burdens  wholly  as  an  operating  ex- 
pense —  so  far  as  apportionment  goes.  The  lumping  of  all  sorts 
of  retirement  contributions  under  the  single  heading  of  "  depreci- 
ation expense"  seems  to  have  arisen  through  (1)  railroad  and 
similar  utility  management  (street  railways  and  telephone  systems) 
with  rates  fixed  more  by  external  circumstances  than  the  actual 
cost  of  the  individual  service  or  through  (2)  the  accounting  of 
product-selling  utilities  where  peak  loads  have  been  so  negligible 
that  distinctions  between  fixed  and  operating  expenses  did  not 


COST-OF-SERVICE  STUDY  OF  RATES  25 

affect  the  unit  cost  of  the  single  class  of  product  supplied.  To 
illustrate:  the  Interstate  Commerce  Commission  states  in  its 
accounting  rules  ("Classification  of  Operating  Revenues  and 
Operating  Expenses  of  Steam  Roads,"  July  1,  1914,  p.  31): 

2.  Maintenance  Expenses.  —  The  accounts  provided  for  maintenance 
of  fixed  improvements  and  of  equipment  are  designed  to  show  the  cost  of 
repairs  and  also  the  loss  through  depreciation  of  the  property  used  in 
operations,  including  all  such  expenses  resulting  from  ordinary  wear  and 
tear  of  service,  exposure  to  the  elements,  inadequacy,  obsolescence  or 
other  depreciation,  or  from  accident,  fire,  flood  or  other  casualty. 

Elsewhere  the  Commission  has  stated  ("Uniform  System  of  Ac- 
counts for  Telephone  Companies,"  Jan.  1,  1913,  p.  67): 

By  expense  of  depreciation  is  meant  (a)  the  losses  suffered  through  the 
current  lessening  in  value  of  tangible  property  from  wear  and  tear  (not 
covered  by  current  repairs);  (6)  obsolescence  or  inadequacy  resulting 
from  age,  physical  change,  or  supercession  by  reason  of  new  inventions 
and  discoveries,  changes  in  popular  demand,  or  public  requirements; 
and  (c)  losses  suffered  through  destruction  of  property  by  extraordinary 
casualties. 

Depreciation  Expense  as  a  Fixed  Charge.  —  While  it  is  seen 
to  be  common  practice  to  regard  depreciation  levies  on  rates  as 
an  operating  charge,  yet  there  are  numerous  instances  where  util- 
ity officials  regard  it  as  a  fixed  or  overhead  charge.  There  is  no 
reason  why,  in  the  formulation  of  adequate  rates,  this  or  the  other 
course  should  not  be  followed  if  circumstances  point  to  that  plan 
as  logical.  Nor  has  there  been  any  good  reason  set  forth  why  a 
ratemaker  may  not  divide  his  depreciation  expense  into  some 
wear-deterioration  and  obsoletion  payments  which  he  thinks 
approximates  the  risks,  and  apportion  them  accordingly  among 
his  customers.  When  such  a  refinement  is  desirable,  an  official 
of  course  expects  that  his  course  will  have  to  stand  the  future 
scrutiny  of  any  regulating  commission  in  authority  as  to  the 
general  fairness  and  reasonableness  of  the  results. 

Apportionment  of  Amortization.  —  Frequently  sums  for  "amor- 
tization" are  mentioned  as  a  burden  on  rates  distinct  from  depre- 
ciation allowances.  Usually  these  are  intended  for  the  retirement 
of  capital  invested  in  franchises,  development  expenditures, 
engineering  work  not  directly  chargeable  to  specific  equipment, 
early  deficits  which  may  have  been  capitalized,  etc.  Amorti- 
zation charges  are  most  necessary  in  the  case  of  an  utility  with  a 


26  PUBLIC  UTILITY  RATES 

limited-term  franchise,  where  there  is  no  certainty  of  selling  out 
and  receiving  back  the  entire  investment  made.  There  are 
many  who  hold  that  all  utilities  should  try  thus  to  reduce  their 
investment  irrespective  of  their  franchise  term  —  so  that  all  the 
present-day  customers  may  pay  all  the  possible  cost  of  the  present 
service,  and  pass  along  for  another  generation  a  burden  of  liabilities 
only  equal  to  the  ready-sale  value  of  the  property  units.  This  is 
an  ideal  not  often  easily  attainable  though  worth  striving  for; 
the  concern  which  can  follow  such  a  course  will  be  on  a  more  secure 
basis  —  for  instance,  free  from  undermining  competition. 

Not  every  utility  can  burden  its  rates  to  this  extent;  not  every 
official  believes  it  is  a  worthy  ideal.  The  best  argument  against 
it  is  based  on  the  fact  that  the  overhead  costs  of  today  are  a  con- 
tinually decreasing  percentage  of  the  total  value  of  a  growing  and 
developing  utility.  That  is  true,  of  course,  but  each  grand  expan- 
sion brings  in  its  additional  overhead  items  and  these  pile  up  a 
possible  weakness  for  the  time  when  the  utility  must  reach  equilib- 
rium. Something  of  this  sort,  it  is  commonly  believed,  has 
brought  about  the  burdensome  capitalization  of  British  railways, 
on  which  no  appreciable  amortization  of  abandoned  investment 
and  development  expenses  has  been  made. 

It  might  seem  at  first,  applying  the  test  for  apportionment  of 
annual  amortization  sums,  that  they  were  simple  charges  on  in- 
vestment and  properly  laid  on  demand  or  capacity  units.  Further 
consideration  shows  that  it  is  desirable  that  all  the  customers 
should  carry  some  share  of  this  burden  (except  perhaps  some  de- 
sirable competitive  business  which  cannot  be  held  if  so  burdened) 
and  this  points  to  the'  inclusion  of  annual  amortization  in  with 
operating  expenses  —  apportioned  among  the  customers  accord- 
ing to  quantity  of  service  or  product  supplied. 

If  the  annual  amortization  sums  which  can  be  secured  are  not 
too  trifling  they  may  be  subdivided  between  quantity-unit  and 
demand-unit  charges.  The  subdivision  ratio  then  would  follow 
the  relative  proportions  of  the  general  organization  and  develop- 
ment investment  to  the  incidental  costs  of  physical  plant  —  un- 
assigned  engineering,  legal  work  for  rights  of  way,  etc. 

Apportionment  of  General  Expense.  —  The  time  and  thought 
of  administrative  officers  and  general  clerks  by  study  will  be  found 
to  be  given  largely  to  the  business  as  a  whole  at  times  or  in 
certain  cases  —  but  also  partly  to  providing  capital  and  equip- 


COST-OF-SERVICE  STUDY  OF  RATES  27 

ment,  and  to  such  an  extent  in  cost  resembles  taxes  and  insurance. 
The  numerical  division  is  not  difficult  to  approximate.  Then 
it  is  logical  to  apportion  the  same  proportion  of  the  salaries 
of  these  officers  and  clerks  (1)  as  a  per  unit  charge  on  all  service 
rendered  or  product  delivered  and  (2)  on  peak-load  demand  as  a 
capacity-unit  charge. 

Distribution  of  rent,  lighting,  water,  heat,  and  other  such 
office  services,  of  general  office  supplies  and  miscellaneous  ex- 
penses may  be  similarly  made,  if  it  is  worth  while  to  have  such 
refinement. 

The  expenses  for  maintenance  of  an  engineering  department 
are  evidently  partly  connected  with  providing  physical  property 
and  partly  with  actual  operation.  The  head  of  the  department 
should  be  able  to  make  a  fair  estimate  of  the  proportion  applicable 
to  each  for  division  as  noted. 

Annual  appropriations  for  hospitals,  welfare  work,  charities, 
etc.,  are  seen  to  be  intimately  associated  with  operating  labor  and 
virtually  amount  to  an  increase  in  labor  cost.  Therefore,  they 
logically  may  be  charged  like  labor,  fuel,  etc.  However,  if  con- 
siderable benefits  come  to  the  employees  in  the  administrative, 
engineering,  and  public-bureau  departments,  then  a  certain  part 
of  the  welfare-work  cost  (generally  according  to  numbers  rather 
than  salaries)  may  be  allocated  as  per-capacity-unit  charges 
according  to  peak-load  demands  and  another  part  according  to 
actual  number  of  customers. 

Advertising,  bad  accounts,  and  interest  on  working  capital  are 
seen  to  be  associated  with  service  rendered  or  product  supplied 
more  than  anything  else,  and  hence  are  like  operating  costs. 

Distribution  of  Metering  Cost.  —  Meter  reading  and  account- 
ing, billing,  and  collecting  costs  obviously  are  about  as  heavy  for  a 
small  customer  as  a  larger  one  and  for  an  off-peak  customer  as  a 
peak-load  one.  These  then  are  expenses  to  be  distributed  on 
customers  according  to  number. 

Labor.  —  There  can  be  usually  little  question  about  the  dis- 
tribution of  labor  (as  part  of  service  or  upon  plant  repairs), 
operating  supplies  like  fuel,  etc.,  repair  and  maintenance  materials, 
etc.,  —  all  as  unit  charges  on  quantity  of  service  or  product. 

Service  Losses.  —  There  seems  to  be  no  better  way,  without 
undue  complication,  to  apportion  the  losses  between  plant  and 
customer  than  according  to  quantity  of  service  given  or  product 


28  PUBLIC  UTILITY  RATES 

delivered.  This  item  covers  the  energy  loss  of  electrical  transmis- 
sion lines,  the  water  and  gas  leakage  from  mains,  etc.  Some 
utilities  have  no  such  losses.  Among  such  are  telephone  and  tele- 
graph services;  in  transportation  utilities  there  may  be  a  loss 
through  uncollected  fares  but  there  is  no  way  of  accurately  ascer- 
taining the  amounts  so  lost  and  service  data  is  based  on  fares 
collected. 

In  gas,  water  and  electricity  distribution,  the  output  of  a  station 
is  metered  and  the  difference  between  this  figure  and  the  sum  of 
the  customers'  meters  gives  easily  and  fairly  accurately  the  losses. 
Even  though  existing,  the  losses  may  not  enter  the  analysis  of 
costs  and  rates.  For  instance,  if  the  total  costs  are  figured  for 
distribution  on  service  actually  rendered,  or  product  actually 
supplied  to  the  customers,  and  not  on  units  of  main-plant  output, 
then  these  figures  cover  the  cost  of  losses.  However,  there  are 
many  cases  arising  when  it  is  desirable  to  know  production  costs 
and  cost  of  losses  separately,  even  if  only  as  a  measure  of  proper 
operation  of  the  utility.  In  that  case  internally  used  service  may 
require  separation. 

Limitations  of  Test  for  Apportionment.  —  Such  a  varied  ap- 
portionment of  expenses  is,  of  course,  to  be  carried  out  more  or 
less  completely  as  needed  information  can  be  secured.  The 
number  of  customers  and  the  total  number  of  units  of  service 
rendered  or  product  supplied  should  be  known.  But  the  ag- 
gregate of  maximum  demands  is  very  seldom  known  with  any 
approach  to  exactitude;  where  no  approximate  idea  can  be  had, 
or  no  reasonable  assumptions  are  possible,  of  the  individual  con- 
tributions to  the  peak  load,  then  the  charges  laid  against  demand 
or  capacity  must  be  apportioned  like  an  operating  charge  on  serv- 
ice units  delivered.  Such  contingencies  however  will  be  rare. 

Indeed,  the  maximum-demand  apportionment  of  part  of  the 
expenses  is  of  great  effect  on  rates  only  in  the  case  of  service 
works.  In  the  case  of  gas  works  as  already  outlined,  much  of 
the  investment  costs  can  be  equitably  borne  directly  by  the  total 
product  supplied.  Usually  this  is  true  also  of  waterworks  —  un- 
less there  is  practically  no  long-storage  capacity  so  that  the  size 
of  the  pumping  installation  is  fixed  by  the  maximum  demand 
rather  than  daily  consumption,  and  unless  much  larger  pipes  are 
required  for  maximum  than  average  flow. 

Where  some  of  the  expense  items  can  be  readily  apportioned 


COST-OF-SERVICE  STUDY  OF  RATES  29 

but  others  cannot,  it  is  common  and  reasonable  practice  to  divide 
the  sum  of  unapportioned  items  according  to  the  aggregate  assign- 
ments already  made.  Details  of  this  scheme  are  shown  in  the 
chapters  on  problems  of  the  specific  utilities. 

The  general  rules  laid  down  for  distribution  of  cost  items  have 
been  so  stated  after  debates  in  which  arguments  for  or  against 
the  rules  and  sub-rules  or  exceptions  have  been  weighed.  How- 
ever, the  mere  fact  that  most  of  these  questions  have  two  sides 
is  enough  to  show  that  specific  cases  may  arise  which  may  decid- 
edly alter  the  arguments  for  the  methods  given.  In  these  ex- 
ceptional cases  the  local  necessities  may  prevent  application  of 
generalized  ideas.  But  it  is  felt  that  such  strange  cases  will  be 
rare  and  that  the  effect  of  peculiar  items  on  rates  so  minor  that 
sufficient  accuracy  will  be  secured  by  any  intelligent  management 
which  consistently  and  conscientiously  strives  to  be  fair  and  open 
minded  and  seeks  competent  advice. 

Revised  Cost  Schedule.  —  Summarizing  the  results  of  such  a 
scrutiny  of  expense  apportionment,  the  following  rearrangement 
of  the  former  list  of  utility  costs  may  be  built  up. 

I.  FIXED  CHARGES.  —  (To  be  allocated  according  to  partici- 
pation in  peak-load  demands,  wholly  or  largely,  except  in  special 
circumstances  or  as  noted  in  chapters  on  problems  of  specific 
utilities.) 

1  -  Return  on  value  of  plant  and  intangibles. 

2  •  —  Rentals  on  leased  property. 

3a  —  Annual  allowance  for  retirements  or  replacements.  (In 
part  only,  and  in  proportion  to  obsolescence  factor  or 
deterioration  from  weather.  See  pages  24  and  111.) 

4  —  Taxes. 

5  —  Fire  insurance  premiums. 

6a  —  Salaries  of  administration  officers  and  clerks.     (In  small 

part  only.) 

7a  —  General  office  expenses.     (In  small  part  only.) 
8a  —  Engineering  department  expense.     (In  part  only.) 
9a  —  Cost  of  repairs  due  to  weathering. 
10  —  Appropriations  to  surplus  reserve  to  secure  bond  interest 

and  dividends  in  lean  years  or  for  contingencies. 

II.  OPERATING  CHARGES.  —  (To    be    allocated    according   to 
quantity  of  service  rendered  or  product  manufactured  or  delivered.) 

3a  —  Annual  allowance  for  retirements  or  replacements.     (In 


30  PUBLIC  UTILITY  RATES 

part  only,  and  in  proportion  to  wear-deterioration  factor. 

See  pages  24  and  111.) 

6b  —  Salaries  of  administration  officers  and  clerks  (in  part). 
7b  —  General  office  expenses.     (In  part.) 
8b  —  Engineering-department  expense.     (In  part.) 

11  —  Operating  labor. 

12  —  Operating  supplies. 

9b  —  Cost  of  repairs  and  maintenance.  (Apart  from  replace- 
ments and  recovery  from  weathering.) 

13  —  Appropriation  for  amortization  of  intangible  values.     (In 

large  part.) 

14  —  Interest  on  working  capital.     (Funds  on  hand.) 

15  —  Cost  of  leaks,  losses,  etc. 

16  —  Bad  accounts. 

17  —  Accident  liability  insurance  costs  or  equivalent. 

18  —  Appropriations    for    hospital    subsidies,    welfare    work, 

charities,  etc. 

19  —  Advertising. 

III.  CUSTOMER  CHARGES.  —  (To  be  equally  allocated  on  in- 
dividual customers.) 

20  —  Cost  of  meter  reading  or  equivalent. 

21  —  Accounting,  billing  and  collecting. 

Gc  —  Salaries  of  administrative  officers  and  clerks  (in  small 
part  only). 

7c  —  General  office  expenses  (in  small  part  only) . 

Simplicity  in "  Rates.  —  It  is  seen  that  the  simplicity  of  a 
given  rate  schedule  primarily  depends  on  the  simplicity  of  the 
business  in  question.  If  the  customers'  characteristics  are  all 
much  alike  then  there  is  but  one  form  necessary  for  the  charge 
and  this  very  frequently  allows  a  flat  rate.  As  the  customers' 
demands  become  dissimilar  we  can  see  that  a  two-factor  basis 
becomes  more  logical,  while  for  all  sorts  of  complications  the  full 
three-factor  base  seems  to  place  on  each  class  the  burdens  of  *its 
peculiar  service. 

It  has  been  argued  that  this  two-  or  three-part  basis,  directly 
visible  in  the  published  schedule  of  an  utility,  is  the  most  equitable 
that  can  be  devised.  In  theory  surely  this  is  so,  but  practically 
the  complexity  of  such  a  schedule,  the  uncertainty  in  the  approx- 
imations of  each  person's  real  participation  in  peak  loads,  the  im- 
possibility of  the  ordinary  customer's  checking  his  bills,  etc.,  do 


COST-OF-SERVICE  STUDY  OF  RATES  31 

not  promote  public  confidence  and  pleasant  relations.  Therefore 
the  two  and  three-factor  basis  will  often  better  form  the  founda- 
tion of  rates  to  be  expressed  in  more  direct  terms. 

Customer  Groups.  —  Simple  tariffs  are  easily  constructed  if  the 
customers  can  be  arranged  in  groups  wherein  the  individual  re- 
quirements are  not  far  from  the  average.  Then  the  fixed  charges 
on  the  peak-load  capacity  required  for  all  the  members  of  a  group, 
plus  the  operating  costs  of  furnishing  the  aggregate  of  service  or 
product  to  the  class,  plus  the  costs  of  dealing  with  the  several 
individuals  of  the  group,  gives  the  total  annual  cost  of  furnishing 
the  group.  If  then  this  figure  be  divided  by  the  total  quantity  of 
service  or  product  for  the  group  during  a  year,  we  have  a  unit 
price  which  it  is  generally  fair  to  impose  on  all  the  members  of  the 
group. 

This  scheme  is  largely  followed,  and  with  widespread  satisfac- 
tion. The  customers  understand  what  they  have  to  pay  and  their 
check  on  bills  is  obvious.  Of  course,  if  the  peculiarities  of  the 
classes  change  materially,  then  the  old  rates  may  be  unfair  either 
to  the  utility  company  or  to  the  customer  —  to  which  depends  on 
circumstances. 

Distribution  of  Fixed  Charges.  —  It  has  been  noted  that 
fixed  charges  were  located  "largely  in  accordance  with  participa- 
tion in  peak-load  demands."  Usually  for  a  group  of  small 
customers  this  participation  may  be  found  by  a  simple  approx- 
imation for  each  class,  being  based  on  group  maximum  demand, 
actual  maximum  peak  delivery  of  the  utility,  and  the  aggregate 
of  the  group  demands,  thus : 

T.  ,                    Actual  Peak 
Group  Max.  X  T—     — ^ TT — — • 

Aggreg.  Group  Max  s. 

This  averages  the  diversity  of  demand  among  the  individuals 
inside  a  class  but  for  small  services  it  is  simple,  practical  and 
reasonable. 

Where  there  are  large  customers  each  one  may  be  handled  like 
a  class  in  the  computation,  basing  the  approximate  participation 
in  fixed  charges  then  on  group  maximum  demands,  large  individ- 
ual maximum  demands,  and  actual  peaks  of  delivery,  thus : 

,    ,.     , ,  Actual  Peak 

Group  or  Indiv.  Max.  X  i 7; —     — T^F — r — ™ — T  ' 

Aggreg.  Group  and  Indiv.  Max  s. 

A  still  further  refinement  in  the  approximation  is  possible  by 


32  PUBLIC  UTILITY  RATES 

assessing  directly  on  each  class  and  each  large  individual  the  whole 
fixed  charges  on  equipment  allotted  to  each  of  them  solely  and 
dividing  charges  on  further  equipment,  used  commonly  by  two 
or  more  of  the  groups  or  individuals,  according  to: 

Indiv.  or  Group  Max.  X  Actual  Peak  on  Joint  Equipment 
Sum  of  Related  Indiv.  or  Group  Max's. 

and  apportioning  charges  on  remaining  plant  serving  all  the  cus- 
tomers (usually  manufacturing  or  storage  equipment)  as  before 

by: 

Indiv.  or  Group  Max.  X  Actual  Peak 
Aggreg.  Indiv.  and  Group  Max's. 

Importance  of  Studying  Individual  Diversity.  —  Individual 
diversity  of  demands  becomes  of  great  importance  in  reducing 
to  a  minimum  the  investment  in  plant  required  between  an  utili- 
ty's manufacturing  plant,  or  its  equivalent,  and  a  customer.  It 
is  obvious  that  if  the  maximum  of  measured  coincident  demands 
of  the  members  of  a  group  is  only  |  the  sum  of  the  individual 
maximum  demands  then  the  investment  in  joint-service  distribu- 
tion apparatus  need  have  only  f  the  maximum  output  capacity 
which  would  have  been  required  had  not  the  individual  diversity 
existed.  This  effect  has  been  studied  most  with  central-station 
electric  service. 

Ends,  Not  Means,  Sought.  —  If  study  of  annual  costs  shows 
an  increasing  figure  for  each  successive  year,  then  the  fairest  ad- 
justment for  practical  conditions  may  be  above  unit  figures  ap- 
plying at  the  moment,  and  vice  versa.  Frequent  scrutiny  -of 
costs,  rates,  and  profits  is  desirable.  But  most  utility  managers 
will  argue  that  the  benefit  of  trifling  changes  is  less  than  the  ex- 
pense and  trouble  involved,  so  that  frequent  and  inconsequential 
revisions  are  not  worth  while  usually. 

No  one  of  various  ways  of  expressing  the  resulting  tariffs  is  to 
be  broadly  recommended  for  all  sorts  of  utilities.  One  town  water- 
works department  may  charge  $5  per  capita  per  year;  another 
similarly  situated  may  charge  $0.35  per  1000  gallons  metered;  a 
third  may  assess  a  user  $1.50  per  outlet  per  year.  All  these  may 
amount  to  the  same  thing  in  the  end.  Some  will  prefer  to  give  a 
unit  price  for  all  comers  with  changing  discounts  for  different 
amounts  of  service  or  time  of  demands.  The  chances  are  that 
all  flat  rates  have  been  empirically  established  and  tinkered  up 


COST-OF-SERVICE  STUDY  OF  RATES  33 

from  time  to  time  to  yield  sufficient  gross  income  without  the 
responsible  officials  knowing  what  is  the  relation  between  rates 
and  actual  cost  of  the  various  customers.  Very  often  diverse 
statements  of  rates  will  yield  substantially  the  same  results 
under  similar  conditions,  and  in  such  cases  we  may  regard  the 
rates  as  equivalent  and  cease  striving  for  mere  methods  of  ex- 
pression —  so  long  as  intent  to  deal  justly  with  all  is  seen. 

Minimum  Charges  to  Cover  Readiness.  —  Practically  all  util- 
ities have  some  form  of  minimum  charge  below  which  a  cus- 
tomer's bill  never  descends,  whatever  the  quantity  of  service 
rendered  or  product  supplied.  This  enables  them  with  certainty 
to  secure  the  annual  fixed  and  customer  charges  which  have 
been  computed  as  fair.  In  the  greater  number  of  utility  com- 
panies the  practice  seems  to  be  to  use  a  straight  monthly  charge; 
water  companies,  however,  very  often  adjust  their  minimums 
to  an  annual  figure.  An  occasional  electric  company  does  the 
same  —  witness  the  Boston  Edison  Electric  Illuminating  Co. 
At  least  one  company  (Public  Service  Electric  Co.,  Newark, 
N.  J.)  gives  a  concession  in  that  it  waives  the  minimum  charge 
on  application  and  renders  no  bill  for  periods  of  one  month  or 
more  when  premises  are  closed  or  current  cut  off.  Where  no 
annual  adjustment  is  made  it  is  evident  that  an  inequitable 
overcharge  may  easily  be  made  since  the  rates  are  based  on 
annual  figures  and  since  the  maximum  demand  is  an  annual 
peak.  A  customer  often  may  fairly  be  allowed  to  ease  up  the 
heavy  consumption  in  one  period  of  the  year  by  the  light  con- 
sumption of  another  —  provided  always  that  the  proper  annual 
demand,  customer  and  quantity  costs  are  secured  by  the  utility. 
The  New  Jersey  Commission,  however,  has  ruled  *  that  simple 
monthly  charges  are  logical  as  well  as  convenient,  basing  its 
contention  on  the  fact  that  salaries  are  paid  weekly  or  monthly, 
depreciation  written  up  monthly,  and  interest  met  semi-annu- 
ally  —  apparently  overlooking  the  more  fundamental  facts  that 
revenue  to  meet  obligations  is  collected  monthly  or  quarterly, 
that  working  capital  is  a  part  of  rate-basis  worth,  and  that  the 
annual  readjustment  of  minimum  charges  is  a  correction  of 
overcharges  beyond  the  actual  proper  annual  figure  based  on 
the  cost-of-service  idea. 

*  Re  Minimum  Monthly  Charges  for  Lighting  Service  by  Electric  Companies ; 
Informal  Proceedings,  January,  1912. 


34  PUBLIC  UTILITY  RATES 

Study  of  Hypothetical  Case.  —  For  a  general  illustration  of 
the  development  of  simple  unit  rates  based  on  cost  of  service  we 
may  arrange  a  hypothetical  case  of  the  most  difficult  sort  —  that 
of  a  service-furnishing  utility  as  distinguished  from  the  product- 
supplying  type.  Assume  that  it  has  five  classes  of  customers; 
(1)  large  users  (10,000  to  20,000  quantity  units)  whose  maximum 
demand  falls  in  hours  of  peak  load,  (2)  small  users  (500  to  1700 
units)  whose  maximum  demand  falls  in  the  same  hours  of  peak 
load,  (3)  large  users  (above  10,000  units)  none  of  whose  demand 
comes  at  hours  of  peak  load,  (4)  small  users  with  similar  off- 
peak  load,  (5)  miscellaneous  users  with  maximum  demands  in 
hours  of  heavy  load  but  taking  service  only  in  summer.  Assume 
further  that  the  utility  has  a  peak-load  output  capacity  of  35,000 
units  (gallons  per  hour,  cubic  feet  per  minute,  kilowatts,  etc.); 
that  the  total  of  all  services  is  expressed  as  30,000,000  quantity 
units  per  year  (gallons,  cubic  feet,  kilowatt-hours,  etc.)  ;  that  the 
fixed  charge,  including  8%  on  the  fair  value  of  plant,  etc.,  is 
$340,000,  while  the  general  operating  and  individual  customer 
charges  reach  respectively  $295,000  and  $67,000.  Assume  that  the 
peak  load  comes  in  winter  with  Group  1  causing  60%  of  the  peak 
and  Group  2,  40%.  Let  the  annual  aggregate  quantity  output 
be  taken  up  55%  by  Group  1,  33%  by  Group  2,  7%  by  Group  3, 
3%  by  Group  4,  and  2%  by  Group  5.  The  number  of  customers 
is:  Group  1,  1500;  Group  2,  13,000;  Group  3,  205;  Group  4, 
120;  GroupS,  55. 

Then  we  can  charge  each  and  every  consumer  per  annum 

,07n  /     $340,000\  , 

$9.70  I  =          '  n   )  per  peak-load  capacity  unit  (maximum  de- 
\         oo,UUU   / 

mand    divided    by    individual    diversity    factor)    plus    $0.0098 

/       $295,000  \  .,      , 

I  =  on  nnn  QAA  )  Per  um*  °*  service,  plus  $4.50  per  customer  per 


year.  But  the  preparation  of  bills  might  be  rather  too  burden- 
some and  the  whole  arrangement  of  rates  too  blind  to  most  cus- 
tomers. Easy,  fair  and  understandable  class  rates  can  be  worked 
out  as  follows: 

Group  1  carries  $204,000  (  =  $340,000  X  0.60)  of  the  annual 
fixed  charges,  plus  $162,300  (  =  $295,000  X  0.55)  of  the  operat- 

ing costs,  plus  $6750  (  =$67,000  X  TJ  ^j  of  the  special  customer 

\  14,ooU/ 


COST-OF-SERVICE  STUDY  OF  RATES  35 

costs;  the  total  is  $373,050  and,  divided  by  the  total  quantity  of 
service  furnished  the  group,  gives  a  unit  rate  of  $0.0230. 

Group  2  similarly  carries  $136,000  in  fixed  charges,  $97,350  in 
operating  costs,  and  $58,500  in  customer  costs,  making  a  total 
of  $291,850  and  a  unit  figure  of  $0.0295.  Group  3  carries  no  part 
of  fixed  charges,  not  causing  any  of  the  peak  load,  —  but  it  has  a 
burden  of  $20,650  operating  costs  and  $922  customer  charges,  a 
total  of  $21,572  and  a  unit  price  of  $0.0103.  Group  4  has  no 
fixed  charges  to  bear  either,  but  carries  $8850  of  the  operating 
burden  and  $540  of  the  customer  costs,  making  $9390  total  and 
$0.0104  unit  price.  Group  5  also  carries  no  fixed  charges,  but 
has  $5900  plus  $248  and  a  unit  price  figure  of  $0.0102. 

The  hypothetical  utility  company  might  then  fairly  draw  up 
the  following  preliminary  rate  schedule  and  claim  it  to  be  sub- 
stantially just  and  reasonable;  or  new  classifications  might  be 
sought  and  the  process  completed  again. 

(1)  For  long-hour  peak-load  customers  whose  annual  consump- 

tion equals  or  exceeds  10,000  quantity  units,  2.30c.  per 
unit. 

(2)  For  short-hour  peak-load  customers  whose  annual   con- 

sumption is  under  10,000  units,  3.00c.  per  unit. 

(3)  For  off-peak  customers,  l.lOc.  per  unit. 

To  avoid  the  abrupt  change  in  rate  to  peak-load  customers  some 
sliding  scale  scheme  may  be  substituted  for  sections*!  and  2. 
For  instance:  For  peak-load  customers  S.OOc.  per  unit  for  the 
first  1000  units,  plus  2.20c.  per  unit  for  the  next  9000  units,  plus 
1.50c.  per  unit  for  all  additional  above  10,000  units  —  or  some 
equivalent  advisable  figure. 

A  minimum  charge  would  probably  be  made  also  to  cover  the 
customer  costs,  the  average  fixed  costs,  and  the  average  quantity 
found  to  be  supplied  to  the  minimum-charge  customers;  this 
would  be,  for  instance,  for  the  short-hour  peak-load  customer 
$4.50  per  annum  plus  say  $0.50  —  the  operating  cost  of  50  odd 
quantity  units  assumed  to  be  taken  here  by  the  average  minimum- 
charge  customer  —  plus  $7  fixed  charge,  amounting  to  $12. 

It  should  be  borne  in  mind  that  the  foregoing  case  merely  illus- 
trates a  method  [of  studying  rates  and  does  not  show  an  example 
of  a  single  utility  to  which  the  quoted  dollars  and  cents  apply. 
It  does  not  even  pretend  to  show  a  widely  applicable  form  of 
schedule,  or  give  the  only  approach  to  the  problem. 


CHAPTER  V 
FAIR  VALUE   OF  UTILITY  PROPERTY 

What  is  Fair  Value.  —  It  has  become  common  in  dealing  with 
public-service  rates  to  say  that  they  should  yield  a  "reasonable 
return"  on  a  "fair  value."  Such  words  sound  innocent  enough 
and  indeed  they  are  widely  accepted  as  denning  a  condition  de- 
sirable to  secure.  But  arguments  continue  over  the  ways  to 
attain  this  end  —  largely  because  one  person  has  one  idea  of  what 
is  meant  by  "fair  value"  and  "reasonable  return"  while  to  an- 
other the  words  do  not  convey  the  same  ideas.  If  limitations  of 
language  could  be  obviated,  each  would  better  comprehend  what 
the  other  was  striving,  for  and  many  of  the  apparent  differences 
might  disappear  through  harmonizing  and  adjustment. 

Here,  unless  made  obviously  otherwise,  "fair  value"  will  be 
taken  to  mean  a  property  worth,  expressed  in  dollars  and  cents, 
on  which  the  utility  company,  for  justice  and  equity  to  the  com- 
pany and  to  the  public,  may  earn  a  greater  or  less  net  percentage 
return  free  and  clear  Of  all  further  deductions.  Sentimental  value 
is  discarded.  This  is  a  description  of  the  results  of  an  evaluation 
—  not  a  statement  of  how  a  desirable  end  may  be  reached.  Ideas 
of  the  proper  road  to  travel  are  many,  as  a  few  paragraphs  will 
show. 

Market  Value  as  a  Basis.  —  In  considering  the  many  valua- 
tions of  utility  property  for  establishing  rate-making  bases  that 
are  now  on  record,  it  is  seen  that  there  are  three  general  theories 
upon  which  they  are  founded.  The  first,  and  to  many  the  most 
obvious,  scheme  (for  years  used  in  work  prior  to  purchase  and 
refinancing  of  a  concern  and  therefore  naturally  transferred), 
seems  to  be  to  set  up  a  "  market  value,"  a  price  which  a  willing 
purchaser  would  give  a  willing  seller.  In  many  cases  of  purchase, 
market  value  has  been  no  more  than  "  earning  value  "  —  capital- 
ized net  earnings;  the  weakness  of  this  as  a  basis  for  rates  is  its 
circular  reasoning,  for  this  value  depends  on  rates  and  rates  in 
turn  on  value.  Utility  properties  are  not  commodities  that  are 
traded  so  frequently  as  to  establish  a  true  market  value  and 

36 


FAIR  VALUE  OF  UTILITY  PROPERTY  37 

appraisers,  therefore,  in  trying  to  set  up  what  they  call  such  a 
basis,  build  up  a  hypothetical  figure  based  on  cost  to  reproduce, 
on  notable  appreciation  of  parts  and  estimated  or  revealed  de- 
preciation, effect  of  mistakes,  and  the  expense  of  building  up  the 
organization  and  business. 

Investment  as  a  Basis.  —  A  second  plan  upon  which  rate- 
making  valuation  has  been  based  is  the  investment  or  sacrifice 
theory.  This  would  give  compensation  for  all  that  the  investor 
has  given  up,  first  and  last,  legitimately  and  in  good  faith,  less 
anything  equivalent  to  a  return  of  investment.  The  investor  is 
penalized  for  any  obvious  lack  of  common  prudence,  ordinary 
foresight  and  good -judgment  of  his  agents,  the  utility  officials, 
but  not  for  unavoidable  mistakes  or  unforeseen  contingencies. 

Equivalent  Substitute  Basis.  —  The  third  plan  is  the  equiva- 
lent-plant theory  which  would  give  the  old  utility  a  value  equal 
to  what  it  would  cost  to  produce  a  new  going  concern  with  the 
most  economical  plant  equipment  available,  and  an  organiza- 
tion and  business  cheaply  built  up  by  having  available  the  latest 
business  experience  and  practice. 

What  Basis  To  Use.  —  The  various  decisions  which  can  be 
generalized  as  noted  in  the  immediately  preceding  paragraphs, 
it  must  be  noted,  do  not  often  completely  or  exclusively  embody 
a  single  theory,  —  or  is  it  essential»that  they  should  when  slavish 
adherence  to  a  single  theory  is  very  apt  to  result  in  absurdity 
and  inequity. 

It  appears  as  though  some  persons  of  pro-corporation  affilia- 
tions employ  whichever  theory  seems  bound  to  result  in  the 
highest  value,  while  others  of  anti-corporation  leanings  act  as 
though  the  aim  should  be  to  produce  the  minimum  value.  Need- 
less to  say,  the  men  of  greatest  influence  exhibit  no  bias  in  either 
direction  but  apparently  seek  to  employ  such  means  as  in  the 
specific  cases  farthest  push  the  attainment  of  fair  treatment  for  all. 

Frequently,  in  utility-rate  controversies  a  "market  value"  is 
pitted  against  a  "substitute-plant  value"  as  being  respectively 
what  a  willing  seller  would  take  and  what  a  willing  purchaser 
would  give.  The  result  in  such  cases  is  usually  a  compromise, 
in  effect  if  not  in  aim,  and  this  compromise  figure  is  very  apt  to 
lie  close  to  that  determined  by  actual  or  probable  investment. 

Present  tendency  seems  to  be  to  give  more  and  more  weight 
to  figures  of  investment  and  investors'  sacrifice  in  determining 


38  PUBLIC  UTILITY  RATES 

rate-basis  worth.  With  the  general  imposition  of  proper  account- 
ing systems  figures  of  investments  and  sacrifice  can  be  more  com- 
pletely secured  than  in  the  past  so  that  a  better  basis  for  value 
by  investment  can  be  established.  Where  regulation  has  been 
longest  established,  there  investment  has  greatest  weight;  it  is 
not  unreasonable  to  expect  that  in  the  course  of  time  the  entire 
country  may  accept  the  theory.  To  cite  a  specific  instance  of 
the  acceptance  of  the  investment  basis,  the  Massachusetts  Public 
Service  Commission  recently  declared  in  the  Middlesex  &  Boston 
Street  Railway  case  (No.  553;  Oct.  1914): 

It  is  argued  by  some  of  the  counsel  that  the  present  value  of  the  prop- 
erty used  by  the  petitioner  is  the  only  amount  upon  which  it  can  claim 
to  earn  a  return.  ...  It  is  sufficient  here  to  observe  that  few  words 
having  a  fundamental  importance  in  dealing  with  questions  of  law  and 
finance  have  been  found  more  difficult  of  accurate  and  generally  accepted 
definition.  .  .  . 

In  this  fairly  consistent  adherence  to  sound  principle  our  Massachu- 
setts public  utility  code  is  in  striking  contrast  with  the  loose  and  hap- 
hazard legislation  as  to  capitalization  in  many  other  states,  which  has 
recently  resulted  in  compelling  their  regulating  commissions  to  resort  to 
reproduction  cost  as  perhaps  the  least  unsafe  basis  for  determining  a  fair 
rate.  Accordingly,  we  rule  that  under  Massachusetts  law  capital  honestly 
and  prudently  invested  must,  under  normal  conditions,  be  taken  as  the 
controlling  factor  in  fixing  the  basis  for  computing  fair  and  reasonable 
rates;  that  if  there  is  mismanagement  causing  loss,  such  loss  must  be 
charged  against  the  stockholders  legally  responsible  for  the  mismanage- 
ment; that  reproduction  cost  either  with  or  without  depreciation,  while 
it  may  be  considered,  is  not,  under  our  law,  to  be  taken  as  the  determin- 
ing basis  for  reckoning  rates. 

It  should  be  noted  that  the  Massachusetts  Commissions  have 
existed,  under  one  title  or  another,  many  years  and  that  this 
policy  may  give  equitable  results  under  continuous  and  long- 
standing regulation  when  it  might  not  apply  fairly  to  previously 
unregulated  properties. 

Investment  as  a  Datum.  —  In  the  absence  of  all  the  historical 
facts  to  establish  investment  figures,  it  may  well  be  the  object  of 
an  evaluation  of  the  utility  property  to  establish  some  figure  as 
what  the  actual  legitimate  investment  of  the  moment  reasonably 
might  be.  Legitimate  investment  may  often  be  a  datum  below 
which  for  common  justice  the  actual  agreed  worth  ought  not  to 
drop  unless  there  is  some  way  of  showing  that  original  capital 


FAIR  VALUE  OF  UTILITY  PROPERTY  39 

probably  has  been  returned  to  the  investor  or  sacrificed  by  a  lax 
management  through  neglect  to  provide  for  depreciation  and  in 
making  renewals  of  worn-out  plant  out  of  new  capital.  What 
the  agreed  worth  may  be,  above  such  a  general  minimum,  may 
involve  the  effect  of  appreciation  in  market  value  of  property  like 
land  (an  increment  to  deprive  a  concern  of  which  without  com- 
pensation the  courts  have  held,  but  may  not  always  hold  for 
quasi-public  concerns,  is  confiscatory  and  unconstitutional). 
This  valuation  figure  must  be  carefully  determined  and  based  on 
good  evidence  to  carry  weight  —  especially  in  court.  The  highest 
courts  repeatedly  have  thrown  out  parts  of  appraisals  that  were 
mere  conjecture.  For  instance,  all  these  several  points  are 
illustrated  by  the  decision  of  the  U.  S.  Supreme  Court  in  the 
Minnesota  Rate  Cases  (230  U.  S.  352;  June  1913).  Two  para- 
graphs are  as  follows: 

It  is  clear  that  in  ascertaining  the  present  value  we  are  not  limited  to 
the  consideration  of  the  amount  of  the  actual  investment.  If  that  has 
been  reckless  or  improvident,  losses  may  be  sustained  which  the  com- 
munity does  not  underwrite.  As  the  company  may  not  be  protected  in 
its  actual  investment,  if  the  value  of  its  property  be  plainly  less,  so  the 
making  of  a  just  return  for  the  use  of  the  property  involves  the  recog- 
nition of  its  fair  value  if  it  be  more  than  its  cost.  The  property  is  held 
in  private  ownership  and  it  is  that  property,  and  not  the  original  cost  of 
it,  of  which  the  owner  may  not  be  deprived  without  due  process  of  law. 

Assuming  that  the  company  is  entitled  to  a  reasonable  share  in  the 
general  prosperity  of  the  communities  which  it  serves,  and  thus  to  at- 
tribute to  its  property  an  increase  in  value,  still  the  increase  so  allowed, 
apart  from  any  improvements  it  may  make,  cannot  properly  extend  be- 
yond the  fair  average  of  the  normal  market  of  land  in  the  vicinity  having 
a  similar  character.  Otherwise  we  enter  the  realm  of  mere  conjecture. 

Court  Decisions  on  Fair  Value.  —  The  courts  have  laid  down 
some  general  requirements  for  determining  "fair  value."  The 
most  quoted  is  the  opinion  of  the  U.  S.  Supreme  Court  in  the 
now  famous  case  of  Smyth  v.  Ames  (169  U.  S.  466). 

The  original  cost  of  construction,  the  amount  expended  in  permanent 
improvements,  the  amount  and  market  value  of  its  bonds  and  stock,  the 
present  as  compared  with  original  cost  of  construction,  the  probable 
earning  capacity  of  the  property  under  the  particular  rates  prescribed 
by  statute  and  the  sum  required  to  meet  operating  expenses,  are  all  matters 
for  consideration  and  are  to  be  given  such  weight  as  may  be  just  and 
right  in  each  case. 


40  PUBLIC  UTILITY  RATES 

It  must  be  remembered  that  this  was  a  broad  outline  made  be- 
fore many  people  had  carefully  considered  these  problems  and  an 
evident  effort  was  made  to  warn  appraisers  of  what  they  must 
examine  in  general  to  use  or  to  discard,  depending  on  purpose,  etc. 

Court  Decisions  not  Yokes  and  Fetters.  —  So  far  in  the  history 
of  this  country,  the  highest  court  benches  have  been  filled  by  the 
best  men  of  learning,  ideals  and  judgment  which  the  country  has 
developed  and,  while  no  one  man  can  be  infallible,  yet  in  the  ag- 
gregate their  opinions  command  respect.  Decisions  of  the  highest 
federal  courts  then  are  usually  to  be  taken  not  as  yokes  and  fetters 
under  which  we  must  necessarily  labor  but  as  rules  of  conduct  by 
which  justice  is  to  be  promoted,  by  which  political  (economic)  and 
industrial  pitfalls  are  to  be  avoided  and  by  which  the  will  of  the 
people  is  made  clear.  If  the  decisions  seem  wrong  to  the  engi- 
neering view  of  economics,  they  are  to  be  persistently  studied  to 
see  if  the  conflicting  ideas  are  not  reconcilable.  Engineers,  how- 
ever, have  a  duty  in  seeking  recognition  for  their  ideas. 

There  is  perhaps  a  widespread  impression  that  high-court  civil- 
action  decisions  are  necessarily  based  only  on  hard  and  fast 
statutes  and  difficultly  appreciated  pyramids  of  blind  precedent. 
But  that  is  not  the  actual  case  —  they  are  in  general  rather  the 
official  interpretations  not  only  of  legislative  will  and  common 
law  but  of  inexorable  economic  principles,  and  they  aim  to  apply 
common  ideas  of  simple  justice  and  equity. 

Court  Errors.  —  However,  in  spite  of  the  ability  and  intent 
of  the  learned  judges,  there  are  cases  where  engineering  knowledge 
and  experience  show  fallacies;  for  instance,  the  point  in  the  de- 
cision of  the  U.  S.  Supreme  Court  in  the  N.  Y.  Consolidated  Gas 
Case  where  the  court  held  that  cast-iron  gas  mains  in  New  York 
City  would  not  withstand  the  equivalent  of  1\  in.  water-head 
pressure  without  strengthening;  again  in  the  Minnesota  Rate 
Case  where  Justice  Hughes  writes  that  railroad  land  must  be 
valued  at  market  value  since  the  roads  have  the  power  of  eminent 
domain  to  take  land  at  market  value  —  which  is  contrary  to  com- 
mon experience  in  condemnation  results.  But  such  decisions 
probably  come  about  through  some  inadequacy  in  each  case  in 
preparation  or  presentation  of  matters  in  which  the  judges  are 
not  as  versed  as  in  law  and  economics,  and  it  is  unsafe  to  generalize 
on  one  or  a  few  selected  decisions,  which  are  apt  to  be  suspended 


FAIR  VALUE  OF  UTILITY  PROPERTY  41 

or  reversed  in  apparent  principle  as  soon  as  the  subjects  are  pre- 
sented in  a  better  way  in  another  case. 

False  Respect  for  Precedent.  —  There  are  people  who  hold 
as  sacred  and  infallible  principle  any  finding  frequently  affirmed 
in  any  court  —  like  those,  for  instance,  bearing  on  the  idea  which 
holds  that  all  "unearned  increments"  of  property  must  fully  re- 
dound to  the  benefit  of  the  owner,  or  on  one  which  affirms  that 
annual  appreciation  of  property  must  not  enter  the  accounts  in 
the  same  way  as  obsolescence  and  amortization  items,  or  one 
which  maintains  that  public-utility  franchises,  having  the  at- 
tributes of  property,  must  necessarily  enter  fair  value. 

The  view  that  courts  are  tied  to  precedent  and  cannot  strike 
out  into  fresh  thought  is  not  supported  by  law  reports,  and  it 
seems  to  deny  the  possibility  of  advance  in  economic  ideas, 
political  principles  and  legal  processes  along  open  paths  toward 
industrial  and  social  democracy. 

Other  Values  than  "  Rate-basis  Worth."  —  Other  phases  of 
"value"  in  public-utility  cases,  besides  basis  of  earnings,  will  not 
be  dealt  with  at  length  here.  It  is  necessary  to  note,  however, 
that  the  restricted  meaning  given  to  "fair  value"  before  makes 
it  quite  different  from  mere  "earning  value"  (or  capitalized  net 
returns)  which  profoundly  affects  "market  value"  of  stocks.  It 
is  also  distinct  from,  because  usually  more  inclusive  than,  "physi- 
cal value"  —  i.e.,  the  "cost  to  replace  new"  or  the  "reproduction 
cost  less  depreciation."  Nor  should  the  restricted  meaning  of 
"fair  value"  here  employed  be  held  synonymous  with  such  un- 
accepted concepts  as  "service  value"  which  has  frequently  de- 
noted original  total  cost  decreased  in  proportion  to  decreased 
ability  to  give  the  original  service  or  original  efficiency  of  oper- 
ation. 

Further,  while  fair  value,  as  defined,  is  parallel  to  "going- 
concern  value"  in  many  respects,  it  is  not  necessarily  the  same 
thing.  Fair  value  will  usually  contain  a  "going-concern"  ele- 
ment since  there  has  been  considerable  expense  in  welding  equip- 
ment and  organization  together  for  effective,  satisfactory  and 
profitable  activity.  But  "going-concern  value,"  as  generally 
meant,  is  a  price  which  may  be  secured  for  an  adjusted  physical 
plant  run  in  connection  with  a  smooth-working  organization, 
internal  good  will  and  external  business  satisfaction;  it  arose  in 
sale  and  condemnation  cases  and  it  belongs  there. 


42  PUBLIC  UTILITY  RATEg 

Some  of  these  factors  should  be  left  out  of  account  in  rate 
making  for  some  of  the  momentary  sale  value  of  a  producing  con- 
cern, even  of  a  regulated  monopoly,  is  due  to  a  constant  expense 
in  keeping  the  internal  organization  "  oiled,"  the  product  or 
service  advertised,  the  customers  satisfied,  etc.  Such  costs  are 
met  from  earnings  and  arise  year  after  year.  If  the  concern  is  to 
sell  out  they  contribute  to  the  price  which  a  willing  purchaser 
would  pay;  if  rate  making  is  under  consideration  any  such  sale 
value  should  not  be  considered  when  it  arose  first  from  regularly 
allowed  development  expense  and  has  been  maintained  as  a  burden 
on  earnings.  Such  value  is  like  centrifugal  force,  —  continued 
action  is  required  for  its  perpetuation  and  the  transferable  value 
of  past  action  is  due  to  momentum;  the  impropriety  of  entering 
it  in  rate  basis  depends  on  its  arising  out  of  the  service  and 
rates. 

Valuation  for  Various  Purposes.  —  The  determination  of  a 
worth  on  which  the  company  may  earn  some  reasonable  net  re- 
turn is  valuation  for  rate-fixing  purposes.  But  this  is  not  the 
only  valuation  that  may  be  made  of  the  same  property.  Even 
though  the  several  valuations  follow  parallel  paths,  include  some 
identical  factors  and  are  under  equally  wise  and  experienced 
legal  and  engineering  advice,  yet  they  may  be  distinct.  There 
can  be  one  valuation  preliminary  to  a  sale  and  transfer,  one  as 
an  aid  in  fixing  proper  capitalization  for  reorganization,  another 
to  find  a  basis  for  the  taxes  which  it  is  proper  for  the  concern  to 
pay,  yet  another  to  give  some  new  accounting  plan  a  more  secure 
foundation  based  on  the  actual  condition  of  an  utility.  Unless 
specifically  stated  or  otherwise  obvious,  "  valuation  "  used  hereafter 
will  mean  "  valuation  for  rate  making"  —the  finding  of  rate-basis 
worth. 

There  are  economists  who  hold  that  there  can  be  no  difference 
in  the  results  of  valuation  for  different  ends.  They  maintain 
that  for  taxation,  for  sale  or  condemnation,  and  for  fixing  finan- 
cial return  there  can  be  but  one  "  value  "  —  that  of  a  sort  of  "  con- 
stitutional property"  which  will  stand  in  court.  While  true  in 
some  cases  perhaps,  this  does  not  always  seem  equitable  and  just 
to  either  corporation  or  public,  as  will  appear  as  the  principles 
and  practice  of  valuation  are  discussed.  What  many  undoubtedly 
mean  is  that  there  can  be  but  one  result  of  a  general  inventory 
and  appraisal. 


FAIR  VALUE  OF  UTILITY  PROPERTY  43 

Take,  for  instance,  one  phase  of  the  very  large  and  involved 
question  of  whether  full  original  investment  or  some  diminished 
figure  is  to  be  the  basis  of  rates.  In  cases  of  sale  it  is  obvious  that 
most  purchasers  of  a  physical  property  will  pay  only  a  depre- 
ciated value  (plus  appreciation)  for  they  assume  the  responsibility 
for  approaching  renewals;  in  rate  making  this  burden  on  the 
owner  may  sometimes  represent  an  investment  on  which  a  re- 
turn may  be  required  to  be  earned  if  it  has  continued  unreturned 
or  unsquandered  while  depreciation  has  been  going  on. 

As  a  further  instance:  in  valuation  for  taxation  the  several 
states'  requirements  vary  greatly.  There  is  supposedly  some 
attempt  to  make  a  corporation  contribute  its  just  proportion  of 
the  expenses  of  organized  government  with  its  police  and  fire 
protection,  stability  of  business  conditions,  etc.  So  far  as  the 
protection  of  mere  physical  property  goes,  the  corporation  of 
course  should  pay  according  to  the  same  scheme  as  the  indi- 
vidual citizens,  and  that  is  usually  a  certain  annual  percentage 
on  "quick-sale  value"  which  may  vary  in  different  localities  say 
from  40  to  80%  of  actual  legitimate  investment.  All  the  concerns 
"property"  and  business  is  protected  by  government  and  hence 
subject  to  taxation.  But  not  all  the  "property"  is  "used  and 
useful  in  service"  —  some  valuable  franchises  for  instance  —  and 
some  may  not  enter  the  rate  basis.  Other  tax  burdens  may  be 
reasonable  under  special  circumstances  —  as  where  presence  of  the 
utility  on  the  highways  brings  added  burdens  to  the  municipality, 
but  those  are  not  pertinent  to  this  discussion.  This  is  sufficient 
to  show,  however,  that  a  valuation  (a  "basis"  it  might  be  better 
to  say)  for  taxation  is  for  radically  different  ends  from  that  of 
rate  making  and  may  be  fairly  attained  through  radically  differ- 
ent theories  of  procedure. 

Value  of  Favorable  Contracts.  —  Contracts  to  supply  special 
service  at  an  attractive  figure  have  been  capitalized  for  transfer 
of  property,  since  a  bidder  for  the  property  would  raise  the  sum 
of  his  bid  as  far  as  he  could  and  still  reap  a  little  return  on  such 
favored  business.  But  to  include  this  in  the  basis  of  rates  is 
obviously  unfair  through  multiplication  of  profits.  Such  con- 
tracts are  property  but  not  "used  and  useful"  in  the  public 
service.  The  question  is  thus  disposed  of  by  the  New  York 
Public  Service  Commission,  First  District,  in  the  Kings  County 
Lighting  Case  (No.  1273,  Oct.  20,  1911): 


44  PUBLIC  UTILITY  RATES 

When  computing  the  capitalized  value  [of  a  favorable  street-lighting 
contract]  from  the  annual  amount,  he  [company's  expert  witness]  used  a 
basis  of  4^%.  But  when  considering  the  fair  rate  of  return  on  such  capital 
value  he  used  10%.  The  fallacy  of  such  a  method  is  evident.  Assume 
an  annual  profit  of  $90,000  to  be  a  fair  return.  Capitalized  upon  a  4^% 
basis  the  value  of  such  a  perpetual  annuity  would  be  $2,000,000.  But 
10%  of  this  would  be  $200,000.  The  more  the  city  pays  the  more  the 
consumer  must  pay.  If  there  is  any  relationship  between  these  two 
factors,  it  is  that  the  more  the  city  pays,  the  less  the  consumer  should 
pay.  The  argument  of  the  company  proves  too  much  for  if  it  is  cor- 
rect, it  could  be  argued  that  every  contract  should  be  similarly  treated. 
All  are  property  and  presumably  all  are  profitable.  Those  that  are  could 
be  capitalized  if  this  one  may  and  the  more  profitable  they  are,  the  higher 
must  the  rates  to  others  be  placed.  Conversely  if  any  one  should  not  be 
profitable,  the  capitalized  loss  should  be  subtracted  from  the  fair  value 
of  the  other  property  and  the  rates  lowered  accordingly. 

Worth  as  Disclosed  by  Accounts.  —  For  aid  in  determining 
continuing  investment  in  physical  equipment,  the  accounts  of  a 
company  should  be  thrown  open.  They  will  be  invaluable  if 
they  have  been  properly  kept  in  ways  now  approved  and  if  there 
are  sufficient  memoranda  on  the  conduct  of  replacement  work, 
repairs,  etc.  However,  the  pioneer  officials  necessarily  had  a 
poorer  understanding  of  present-day  requirements,  so  that  their 
accounts,  even  when  preserved,  are  open  to  various  interpre- 
tations with  consequently  limited  reliability  and  value. 

Worth  as  Disclosed  by  Appraisal.  —  In  cases  of  inadequate 
records,  it  is  necessary  to  work  back  from  an  inventory  of  the 
plant  as  it  exists  today,  in  fixing  fan*  value.  There  are  two  as- 
sociated ideas  in  the  reason  for  this:  First,  it  is  a  logical  step  in 
studying  property  "at  present  used  and  useful"  which  the  U.  S. 
Supreme  Court  has  reminded  us  must  be  considered;  secondly, 
it  looks  toward  finding  probable  legitimate  investment  which  is 
an  important  factor  in  fair  value.  Efforts  to  work  up,  from  in- 
complete and  vague  accounts,  a  probable  figure  for  actual  legiti- 
mate investments  in  force  are  usually  too  speculative  to  carry 
weight.  Sometimes  the  early  affairs  of  a  concern  are  so  involved 
and  the  transactions  so  questionable  that  it  is  necessary  to  let 
the  past  lie  dead  and  to  find,  instead,  the  investment  required 
in  such  a  property  today. 

Actual  or  Substitute  Plant?  —  There  may  be  special  cases 
where  the  utility  plant  has  been  established  by  such  incompetent 


FAIR  VALUE  OF  UTILITY  PROPERTY  45 

hands  that  it  is  necessary  hi  the  public  interest  to  fix  the  reason- 
able investment  in  such  a  plant  as  the  probable  total  cost  with  a 
more  modern  equipment  substituted  for  that  in  use.  But  in 
most  cases  appraisers  are  attempting  to  find  the  most  probable 
investment  in  the  actual  plant  as  it  was  obliged  to  develop,  and 
not  in  an  ideal  plant  as  it  might  be  developed  under  later  con- 
ditions. 

This  is  usually  necessary  since  there  is  too  much  difference  of 
opinion  as  to  the  design  of  the  substitute  plant  and  too  many 
ways  of  giving  the  desired  service  to  allow  close  agreement  among 
different  appraisers  or  to  approach  a  comparable  basis  in  differ- 
ent cases;  too  much  speculation  is  introduced.  Further,  justice 
to  the  investors  indicates  the  need  of  taking  equipment  procurable 
at  the  time  of  installation  .and  not  the  best  the  art  affords  today. 

Bearing  of  Original  Conditions.  —  The  foregoing  reasoning 
also  logically  advises  us  to  take  into  account  the  environment  of 
the  works  and  local  conditions  existing  during  the  development 
period.  For  example,  if  extensive  city  buildings  have  been 
erected,  the  razing  of  known  or  very  probable  old  structures 
should  be  included  in  the  cost  of  the  new  ones.  If  a  reservoir  has 
been  created,  the  cost  of  buildings  destroyed,  the  expense  upon 
highways  and  railways  that  have  been  moved  and  for  any  special 
cleaning  up  of  the  site  that  was  needed  —  these,  logically  and  in 
fairness,  all  should  be  included  in  the  cost  of  the  reservoir.  There 
should  be  some  acceptable  evidence,  however,  showing  the  extent 
of  all  such  work.  Mere  conjecture  is  ruled  out. 

For  establishing  the  most  probable  investment,  as  originally 
made,  the  unit  prices  of  property  items  used  would  be  those 
prevailing  at  the  time  of  original  construction.  But  where  any 
considerable  period  has  passed,  the  desired  figure  is  a  continuing 
investment  —  which  is  affected  by  changed  prices  of  materials  and 
labor,  renewals  of  older  equipment,  etc.,  so  that  present  prices 
are  commonly  combined  with  historical  conditions.  This  gives  a 
short  cut  over  rinding  an  original-investment  figure  and  adjusting 
it  to  date. 

There  are  vexatious  problems,  however,  in  considering  the 
bearing  of  original  conditions;  take,  for  instance,  the  "paving 
over  mains  "  cases.  It  is  obvious  that,  if  water  or  gas  mains  or 
electric  conduits  have  been  put  down  under  expensive  pave- 
ment which  had  to  be  torn  up  and  replaced,  then  the  cost  of  the 


46  PUBLIC  UTILITY  RATES 

installation  is  considerably  greater  than  for  streets  with  inex- 
pensive surfacing.  Therefore  some  companies  claim,  as  the  present 
value  of  their  mains  and  conduits  under  improved  streets,  some 
figure  approaching  the  present  cost  of  putting  down  the  pipes 
and  ducts  —  irrespective  of  whether  the  new  paving  was  laid  be- 
fore the  mains  or  after.  Justice  to  the  public  would  seem  to  in- 
dicate that  the  increased  value  be  admitted  only  in  the  case  of 
subsequent  mains,  etc.,  otherwise  for  each  such  municipal  im- 
provement the  city  is  to  be  penalized  by  higher  utility  rates. 
While  the  U.  S.  Supreme  Court  has  held  that  a  present  worth  is 
to  be  the  fair  value  sought  in  general,  yet  it  has  specifically  ruled 
(Des  Moines  Gas  Case,  June  1915)  that  new  paving  over  old  lines 
is  to  be  excluded. 

Some  experts  hold  that  strict  adherence  to  a  plan  of  estimating 
the  cost  of  reproducing  the  actual  existing  property  as  though 
built  today,  is  the  only  consistent  attitude  which  will  satisfy  the 
courts.  This  has  an  apparent  benefit  at  first  of  dispensing  the 
same  degree  of  j  ustice  to  all  —  not  discriminating  between  those 
properties  whose  history  is  obscure  and  those  wherein  the  effect 
of  historical  conditions  is  apparent.  To  many  others  perfect  con- 
sistency is  not  more  apparent  with  the  neglect  of  such  historical 
facts  so  far  as  they  are  satisfactorily  secured  —  it  merely  means 
establishing  the  cost  of  the  property  and  its  continuing  value  to 
date  so  far  as  facts  disclose  it.  There  seems  to  be  no  inconsist- 
ency between  the  use  of  current  prices  of  materials  and  the  con- 
sideration of  past  actions  —  it  is  using  all  the  available  data  to 
full  extent  and  neglecting  none.  However,  valuation  work  is  in 
a  formative  stage  and  the  last  word  has  not  been  said;  all  these 
points  in  specific  cases  are  indeed  often  questions  with  two  sides. 

Depreciated  Value  as  a  Basis  of  Rates.  —  Many  commissions 
sanction  the  use  of  actual  (or  reproduction)  cost  less  accrued  de- 
preciation as  the  actual  (or  probable)  investment  of  the  moment. 
Many  of  the  most  eminent  corporation  officials  condemn  such  a 
practice  in  strongest  terms.  Both  parties  are  evidently  striving 
for  just  treatment  of  either  utility  or  customer.  Since  justice  to 
corporation  and  public  can  usually  be  secured  simultaneously, 
the  contradictions  of  this  question  should  be  more  apparent  than 
real.  The  trouble  is  that  these  generalizations  are  put  forth  with- 
out some  statement  of  underlying  premises.  The  proposition  to 
subtract  "depreciation"  from  actual  or  reproduction  cost  must  not 


FAIR  VALUE  OF  UTILITY  PROPERTY  47 

be  separated  from  an  explanation  of  the  treatment  of  annual  de- 
preciation allowances. 

It  is  reasonable  to  expect  that  a  concern  should  not  earn  on  its 
original  investment  if  there  is  evidence  that  extra  large  dividends 
have  been  passed  back  to  the  stockholders  instead  of  providing 
for  the  inevitable  depreciation  in  service  value  of  plant  or  amortiz- 
ing some  of  the  early  development  costs,  especially  promoters' 
profits.  There  might  then  be  good  ground  for  holding  that  the 
investors  had  had  returned  to  them  that  part  of  their  investment 
represented  by  drop  in  value.  But  where  very  modest  returns 
have  been  made,  where  management  has  been  careful  and  where 
there  is  no  suggestion  of  improper  demands  of  the  promoters, 
justice  to  the  investors  would  indicate  that  they  should  not  lose 
part  of  their  funds  just  because  the  utility  had  not  been  able  to 
lay  up  funds  enough  to  pay  for  all  replacements  expected  soon. 
The  loss  of  this  much  capital  can  hardly  be  called  one  of  the 
"risks  of  the  business"  covered  by  the  expected  dividends  — 
especially  since  the  importance  of  burdening  rates  with  depre- 
ciation allowances  was  hardly  appreciated  fifteen  or  twenty 
years  ago.  But  such  deficits  generally  are  counted  in  with 
cost  of  business  development  rather  than  with  value  of  physical 
property. 

Some  argue  that  when  depreciation  allowances  are  being  ac- 
cumulated from  earnings,  a  company  ought  not  to  earn  on  the 
present  depreciation  in  physical  worth.  Really,  equity  depends 
on  how  one  handles  these  annual  contributions  of  the  customers 
taken  to  offset  depreciation.  One  popular  scheme  is  to  put  in 
the  rates  such  annual  allowances  as  would,  on  being  put  out  at 
compound  interest,  equal  the  unredeemed  cost  of  the  several 
items  of  property  at  the  end  of  the  useful  life  of  each.  In  that 
scheme  the  annuity  does  not  fully  equal  the  depreciation;  it  is 
obvious  that  the  sums  derived  from  these  allowances  have  to  be 
invested  somewhere  in  order  to  be  ample.  Therefore  whether 
they  are  invested  inside  the  business  or  outside,  they  are  not  free 
capital  and  are  bringing  in  returns  only  for  their  own  proper  up- 
building. In  such  cases  justice  to  the  investor  indicates  that 
something  equivalent  to  the  full  undepreciated  investment  should 
be  in  the  earning  basis.  Conflicting  views  in  this  case  are  har- 
monized by  noting  that  the  sinking-fund  reserve  is  analogous  to 
reserve  equipment,  and  fills  the  gap  between  depreciated  value  of 


48  PUBLIC  UTILITY  RATES 

plant  and  continuing  investment.  (See  further  discussion  of  de- 
preciation in  Chapter  VIII.) 

Another  scheme  of  providing  funds  to  meet  depreciation  burdens 
the  gross  earnings  with  an  equal  sum  each  year,  the  sum  being 
figured  by  dividing  the  total  cost  of  each  property  item  by  its 
probable  life.  Modifications  of  this  plan  make  the  payments 
unequal  each  year  of  probable  life,  being  smaller  at  first  and 
larger  toward  the  last.  Such  methods,  it  is  plain,  provide  direct 
and  immediate  compensation  for  depreciation  in  worth  and  the 
allowances  do  not  have  to  be  put  out  at  interest  to  assist  in  their 
own  accumulation.  They  are  in  the  nature  of  a  repayment  of 
destroyed  investment  —  sums  which  the  company  may  re- 
invest as  it  sees  fit.  As  depreciation  in  value  has  thus  been  cur- 
rently compensated  for,  then,  and  only  then,  is  it  just  that  a 
correspondingly  diminished  investment  be  used  in  the  basis  of 
earnings,  instead  of  full  investment  as  before.  (See  also  later 
discussions  of  depreciation.) 

Use  of  Appreciation  in  Value.  —  There  have  been  cases  where 
it  was  attempted  to  have  the  appreciation  of  an  utility's  property 
(usually  land)  enter  the  income  accounts,  since  the  trend  of  court 
decisions  is  to  denote  such  "increments  in  market  value"  as 
property  and  hence  as  an  earning  investment.  Any  general 
doctrine  that  public  utilities  must  expect  to  forego  "unearned  in- 
crements" in  land  has  not  been  yet  widely  accepted  —  although 
there  is  some  superficial  plausibility  in  the  oft-repeated  claim  that 
"unearned  increments"  should  not  enter  fair  value  (for  rates)  in 
view  of  the  increasing  protection  against  "unearned  decrements" 
in  property.  It  is  necessary  to  inquire  into  the  "increments" 
and  "decrements"  in  specific  cases  really  to  understand  when  and 
why  they  should  affect  the  valuation  and  the  accounts. 

The  inclusion  or  exclusion  of  unearned  increments  in  utility 
valuation  is  not  a  simple  case  like  a  boom  or  slump  in  real  estate 
where  no  one  knows  with  complete  certainty  whether  a  develop- 
ment will  succeed  or  fail.  In  general  it  is  equitable  to  deny  an 
increment  only  when  protecting  against  a  decrement.  The 
private  real-estate  promoter  stands  the  chance  of  either  loss  or 
gain,  but  in  an  utility  a  certain  loss  in  the  value  of  original  prop- 
erty is  certain  while  any  increase  is  doubtful.  Unless  the  pro- 
tection against  loss  is  complete  there  can  be  no  equitable  denial 
of  increments. 


FAIR  VALUE  OF  UTILITY  PROPERTY  49 

What  the  utility  is  protected  against  is  the  financial  loss  due 
to  a  reduction  in  value  of  plant  resulting  from  service.  A  certain 
deterioration  is  inevitable  —  the  irreparable  attrition  due  to 
service  rendered.  Even  obsolescence  and  inadequacy,  elements 
in  depreciation  which  are  expected  to  be  problematical,  in  ex- 
perience are  found  generally  inevitable.  None  of  the  utility  arts 
and  sciences  stand  still  long  enough  but  what  inadequacy  and 
antiquation  are  manifested  in  service  plants;  one  has  only  to 
think  of  telephone  equipment,  street-lighting  apparatus,  steam 
engines  and  turbines,  street  cars,  railway  locomotives  and  track, 
gas  retorts  and  holders,  reciprocating  and  centrifugal  pumping 
engines,  etc.,  to  see  the  process.  The  public  benefit  of  this  pro- 
tection is  reflected  in  lower  rates  of  return  in  capital,  not  in  elim- 
ination of  increments. 

What  the  utility  is  not  protected  against,  as  yet,  is  a  slump  in 
market  value  of  property  (mostly  land)  due  to  outside  influences 
not  connected  with  the  service.  This  is  the  antithesis  of  the 
unearned  increment  which  some  would  deny.  If  the  protection 
has  not  been  given,  denial  of  the  effect  of  a  boom  does  not  seem 
equitable. 

In  some  cases  such  protection  is  tacitly  assumed.  Take,  for 
instance,  the  much  debated  case  of  new  paving  over  old  mains, 
a  case  of  possible  unearned  increment  generally  denied  the  utility. 
If  the  pavement  perchance  became  so  peculiarly  bad  that  it  was 
cheaper  than  ever  before  for  a  concern  to  dig  to  its  mams,  or  that 
it  had  to  replace  no  street  surfacing,  then  the  earning  power  of 
the  main  would  not  decrease  and  there  would  be  no  demand  that 
the  value  of  mains  be  diminished.  Here  the  company  is  pro- 
tected against  an  unearned  decrement  and  prevented  from  bene- 
fiting from  a  possible  increment. 

The  arguments  for  balancing  both  appreciation  and  deprecia- 
tion in  valuation  and  operation  accounts  were  best  stated  by 
M.  R.  Maltbie  when  on  the  New  York  Public  Service  Com- 
mission for  the  First  District.  His  arguments  in  the  first  place 
seem  to  be  based  on  a  decision  of  Judge  Hough  in  the  earlier  N.  Y. 
Consolidated  Gas  case  (157  Fed.  Rep.,  855),  quoted  thus: 

Upon  reason  it  seems  clear  that  in  solving  this  equation,  the  plus  and 
minus  quantities  should  be  equally  considered,  and  appreciation  and  de- 
preciation treated  alike. 


50  PUBLIC  UTILITY  RATES 

In  the  opinion  for  the  Queens  Borough  Gas  &  Electric  Co.  case 
(Informal  Proceedings,  June  1911),  the  Commissioner  stated: 

Thus  land  has  been  taken  at  its  fair  value  and  not  at  its  original  cdst, 
and  the  annual  appreciation  of  land  has  been  treated  as  a  profit.  By 
this  method  all  property  is  treated  absolutely  alike  as  Judge  Hough  sug- 
gests. No  difference  is  made,  except  that  as  depreciation  represents  a 
decrease  in  assets,  it  is  placed  as  a  debit  against  operation,  while  appre- 
ciation is  placed  as  credit  because  it  is  an  increase  in  assets.  If  property 
is  to  be  taken  at  its  depreciated  value  where  it  has  depreciated,  an  entry 
must  regularly  be  made  in  estimated  operating  expenses  equal  to  the 
average  annual  depreciation.  Conversely  if  land  or  any  other  property 
which  genuinely  appreciates  in  value  is  to  be  taken  at  its  appreciated 
value,  then  an  entry  must  be  made  in  the  estimated  receipts,  equal  to 
the  average  annual  appreciation. 

It  is  suggested  that  the  annual  increase  in  the  value  of  land  which  is 
treated  as  income  is  not  actually  received.  Increase  in  the  value  of  un- 
occupied land  is  not  realized  until  sold  or  put  into  use,  but  it  is  real, 
nevertheless,  although  payment  may  be  deferred.  Likewise,  payments 
to  the  depreciation  fund  are  not  actually  expended;  yet  they  have  been 
considered  legitimate  charges  in  practically  every  case.  Furthermore, 
the  annual  increment  is  no  more  indefinite  than  the  total  increment  — 
the  present  value.  There  is  a  further  similarity,  the  exact  amount  of 
depreciation  and  the  annual  rate  are  not  definitely  known  until  the  piece 
of  property  is  actually  replaced  or  has  become  useless.  Total  apprecia- 
tion and  the  average  annual  rate  are  not  known  until  the  land  is  sold. 
The  depreciation  of  the  buildings  is  a  charge  against  operation;  why 
should  not  the  appreciation  of  land  be  a  credit? 

In  the  later  case  of  Merihew  v.  Kings  County  Lighting  Co. 
(No.  1273,  Nov.  1911),  one  reads: 

The  company  apparently  desires  that  the  Commission  shall  increase 
the  value  of  the  land  and  then  eliminate  all  reference  to  such  increase  in 
the  profit  and  loss  amounts,  thereby  the  company  would  be  enabled  to 
collect  from  gas  consumers  7  or  8%  upon  the  value  of  the  land  and  also 
retain  the  unearned  increment  from  the  land  itself,  thus  obtaining  double 
return.  The  profit  obtained  from  increasing  land  values  is  just  as  real 
as  any  profit.  The  person  who  rents  property  that  costs  him  $10,000 
several  years  ago  at  a  rental  which  yields  him  a  return  on  $50,000  has 
just  as  certainly  realized  a  profit  from  the  increased  value  of  the  land  as 
if  he  had  sold  it  and  invested  the  $50,000  elsewhere.  The  Commission 
has  throughout,  from  1909  to  1913,  allowed  7^%  return  upon  the  in- 
creasing value  of  the  land,  and  it  must,  in  order  to  be  consistent,  consider 
the  annual  increase  as  a  profit  for  the  purposes  of  this  case." 


FAIR  VALUE  OF  UTILITY  PROPERTY  51 

But  the  highest  court  of  the  state  threw  out  this  annual  ap- 
preciation allowance,  confirming  the  court  below  which  held  that 
it  was  not  income  and  an  asset  available  for  paying  debts  and  so 
was  not  permissible  in  the  annual  accounts. 

There  still  remains  one  unsettled  problem  connected  with  the 
Maltbie  plan  of  entering  the  annual  increment  of  land  among  the 
earnings.  The  treatment  is  not  quite  analogous  to  that  of  de- 
preciation; the  latter  is  paid  for  and  a  certain  deduction  made 
in  the  rate-basis  worth  and  in  the  fixed  charges.  Where  the  in- 
crement is  entered  among  earnings  a  certain  addition  is  made  to 
the  rate-basis  worth  and  the  fixed  charges  are  increased  there- 
after. In  the  case  of  depreciation  the  present  customers  pay  the 
bill  of  loss  and  the  deal  ends  there.  In  the  case  of  appreciation 
the  company  pays  the  bill  of  gain  and  only  the  present  consumers 
get  the  benefit;  all  the  consumers  of  future  years  have  to  pay 
interest  on  what  the  present  ones  gain.  That  creates  a  tendency 
of  fixed  charges  which  is  in  the  wrong  direction  —  for  effort 
should  be  made  toward  the  reduction  of  fixed  charges  rather  than 
their  increase.  It  may  be  that  this  tendency  is  necessary  in  this 
case,  but  the  last  word  has  not  been  said. 


CHAPTER  VI 

VALUATION  AS  AN  ENGINEERING  TASK;    APPRAISAL 
OF  LAND   AND   WATER  RIGHTS 

The  General  Problem.  —  Determination  of  reproduction  cost 
or  reproduction  less  depreciation  is  essentially  an  engineering 
problem.  Theoretically,  there  is  one  true  figure  to  be  found  in 
each  case,  but  practically  there  are  as  many  different  sums  as 
there  are  attempts  to  appraise  —  owing,  in  addition  to  the  honest 
differences  of  opinion  already  noted,  and  even  under  the  most 
favorable  conditions,  to  error,  unconscious  prejudice,  unrecog- 
nized influence,  variable  prices  of  materials  and  work,  and  the 
varied  experiences  of  the  engineers  in  charge. 

It  is  almost  trite  to  say  that  the  appraisal  should  be  under  the 
guidance  of  the  best  engineer  the  available  funds  permit,  for 
heretofore  valuation  has  been  made  largely  when  subject  to  re- 
view by  courts  and  commissions. 

Selecting  the  Engineers.  —  To  carry  weight,  the  work  must  be 
consistently  detailed  and  reasonably  accurate;  the  engineer  must 
have  a  reputation  for  conservatism,  carefulness,  and  lack  of 
prejudice  either  for  or  against  corporations. 

It  is  well  to  recognize  that  there  are  many  able  appraisers  in  this 
country  whose  experience  has  been  all  on  one  side  or  the  other 
of  these  questions.  While  they  believe  themselves  to  be  eminently 
fair,  their  figures  have  almost  always  been  discounted  by  court 
or  commission  until  experience  warns  that  their  employment 
will  be  regarded  as  special  pleading  and  their  results  will  weaken 
rather  than  strengthen  the  merits  of  their  client's  case.  Indeed, 
some  engineers  seemingly  will  not  accept  appraisal  tasks  in  ac- 
tions against  an  utility  corporation  and  others  probably  would 
not  be  employed  by  such  concerns.  On  the  other  hand,  there  are 
many  prominent  men  who  seem  to  enjoy  the  confidence  of  public 
officials,  corporations,  courts  and  commissions  alike;  naturally 
their  experience  becomes  more  varied  and  valuable  each  year. 

Helping  or  Hindering  the  Engineer.  —  In  much  of  the  work 
that  valuation  runs  into,  so  many  interpretations  of  fact  can  be 

52 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  53 

made  under  any  peculiarities  of  a  particular  case,  that  the  employ- 
ers must  take  their  engineer  into  full  confidence  about  every  phase 
of  their  problem.  Few  would  employ  legal  counsel  without  treat- 
ing them  so  —  if  they  expected  good  results;  it  is  equally  im- 
portant on  the  engineering  and  economic  sides.  The  engineer's 
experience  always  can  bring  out  valuable  suggestions  of  procedure, 
leading  to  greater  public  confidence  in  the  client  and  fairer  deal- 
ing all  around.  Yet  many  concerns  secure  an  engineer  to  find 
the  value  of  their  property  without  advising  him  fully  about  every 
possible  use  of  the  results,  which,  if  foreseen,  might  demand  special 
consideration  of  fact. 

Cost  of  Appraisal.  —  When  an  engineer  of  reputation  is  re- 
tained to  organize  and  direct  valuation,  the  whole  work  may  be 
expected  to  cost  from  $0.25  to  $1.25  per  $1000  in  property  studied. 
The  lower  limit  applies  to  large  and  uniform  property  arrange- 
ments, the  higher  limit  covers  smaller  collections  of  diversified 
and  scattered  property.  Some  railroads  have  been  appraised  at 
$2  per  mile  (Texas  Commission),  but  with  much  expense  borne 
by  the  roads.  Others  have  cost  $6.50  per  mile  (Michigan)  where 
everything  was  done  by  the  appraisers.  These  sums  amounted 
to  about  $0.137  and  $0.424  per  $1000  worth  of  property.  The 
1915  appraisal  of  the  $84,000,000  property  of  the  New  York  Tele- 
phone Co.  cost  $500,000^—  $6  per  $1000.  This  was  intricate  work. 

Where  men  of  broad  experience  and  accepted  standing  can 
be  employed  to  direct  an  appraisal  it  is  frequently  possible  to 
cut  down  the  cost  by  various  approximations.  But  it  has  more 
often  been  considered  that  most  cases  might  come  before  the 
courts  and  that,  to  stand  there,  the  appraisal  must  show  a  most 
detailed  inventory  of  minor  as  well  as  major  equipment.  This 
idea  may  prove  to  be  a  misapprehension.  Rapid  and  inexpen- 
sive methods  of  valuation  giving  over-all  results  of  substantial 
accuracy  are  necessary  in  many  cases  —  notably  for  bankers' 
participation  in  utility-refinancing  schemes  and  for  insurance 
of  manufacturing  establishments.  The  experience  in  the  latter 
field  has  been  correlated  to  a  notable  extent  and  the  accom- 
plishments of  such  an  organization  as  the  Inspection  Department 
of  the  Associated  Factory  Mutual  Fire  Insurance  Companies  are 
worthy  of  careful  study  by  utilities.*  Some  details  of  this  work 

*  Mr.  J.  G.  Morse  presented  the  results  of  his  work  as  Appraiser  for  the 
Inspection  Department  in  a  paper  "  Valuation  by  Approximation "  at  the 


54  PUBLIC  UTILITY  RATES 

are  discussed  a  little  later  under  the  topic  "  Short  Cuts  in  Ap- 
praisal." The  intervening  remarks  apply  particularly  to  current 
practice  in  utility  rate  cases  —  without  constituting  a  defense  of 
every  practice  noted. 

Preliminary  Investigation.  —  A  first  step  in  appraisal  is  to 
search  out  and  compile  all  possible  historical  data,  and  all  con- 
struction and  operating  accounts  of  the  concern  in  question,  to 
see  if  real  knowledge  of  investments  can  be  secured,  to  find  what 
depreciation  compensation  has  been  levied  on  customers  and 
where  such  money  has  been  put,  to  learn  what  hardships  the  pro- 
moters and  investors  have  endured,  to  discover  possible  improper 
manipulations  of  capital,  etc.  Generally,  this  first  step  has  been 
productive  of  meager  and  disappointing  results. 

The  Inventories.  —  The  second  step  in  appraisal  is  the  prepa- 
ration of  a  detail  inventory  —  a  listing  of  the  tangible  property 
and  related  intangible  items  with  remarks  on  condition  of  various 
items  and  any  information  affecting  worth  —  dimensions,  mate- 
rials, qualities,  design,  condition,  important  specifications,  finish, 
date  of  installation,  repairs,  condition,  scrap  value,  contractors' 
profits,  cost  of  engineering  and  contingencies.  In  "inventory" 
here  are  included  all  papers  from  the  first  field  and  office  notes  to 
the  final  summaries. 

Really,  the  building  up  of  a  public-utility  inventory  is  in  several 
distinct  steps  instead  of  one,  as  might  be  thought  from  the 
foregoing.  There  is  first  an  office  inventory,  based  on  the  prelim- 
inary investigation  and  any  information  furnished  by  the  com- 
pany. That  inventory  can  be  expected  to  be  little  more  than 
a  mere  listing  of  equipment  which  is  expected  to  be  found  but  it 
facilitates  the  preparation  for  the  inspectors'  efforts.  It  is  often 
useful,  particularly  in  the  absence  of  the  pre-inventory,  to  study 
forms  devised  elsewhere  for  the  field  work.  A  number  of  com- 
plete systems  have  been  published  as  worked  out  by  various 
Commissions  and  private  firms.  Those  in  charge  of  this  detailed 
study  must  be  very  familiar  with  the  design  and  operation  of  such 
properties  as  are  under  examination. 

In  mapping  out  the  inspectors'  work,  only  a  few  main  divisions 
can  be  made,  and  these  along  natural  lines,  or  else  there  will  be  so 

Valuation  Conference  of  the  Utilities  Bureau,  in  Philadelphia,  November, 
1915;  for  proceedings  of  this  Conference  see  the  Bureau's  "  Utilities  Maga- 
zine," January,  1916. 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  55 

much  property  on  the  borders  of  several  divisions  that  no  force 
lists  it,  each  one  thinking  some  other  division  had  recorded  it. 
Beyond  this,  it  is  not  here  possible  to  make  detailed  rules  as  to 
how  the  inventory  must  or  must  not  be  made.  It  can  be  said, 
however,  that  as  generally  successful  a  plan  as  any  has  placed  the 
inspection  and  cataloging  of  these  major  divisions  on  separate 
parties  (or  for  small  properties  on  the  same  party  at  different 
times)  with  instructions  to  follow  a  logical  or  orderly  path  in 
their  endeavor  to  get  everything  of  the  particular  nature  then 
dealt  with.  Such  major  divisions  of  inventory  may  be  for  in- 
stance; land,  buildings,  machinery  (and  rolling  stock),  service 
lines  (track,  wires,  pipes,  etc.),  supplies,  furniture  and  tools. 

When  a  paper  pre-inventory  has  been  worked  up  from  records 
supplied,  the  inspectors'  work  is  more  a  checking  than  an  original 
listing.  When  blank  forms  have  to  be  developed  it  is  an  aid  to 
follow  the  standard  classifications  of  accounts  in  general  use  as 
developed  by  the  Interstate  Commerce  Commission,  the  several 
state  commissions,  the  National  Electric  J^ight  Association,  the 
American  Electric  Railway  Association,  etc.  Their  service  con- 
sists chiefly  in  reminding  of  detailed  items. 

It  has  been  found  well,  too,  to  have  the  listers  or  inspectors 
confine  themselves  in  the  field  work  to  mere  cataloging  of  property 
items  and  all  available  information  about  them.  Then  they  study 
one  grand  division  of  equipment  to  the  exclusion  (temporarily  at 
least)  of  the  others  and  that  is  the  extent  of  such  classification 
as  is  worth  while  by  these  men.  For  further  rearrangement  of 
items  into  different  groups,  pure  office  help  is  believed  by  some 
engineers  to  be  the  best  —  under  technical  scrutiny  of  course. 

The  property  items  listed  should  be  complete  in  every  important 
detail,  so  as  to  determine  character  and  probable  cost,  but  pursuit 
of  petty  details  beyond  that  point  is  expensive  and  useless.  This 
point  alone  shows  the  necessity  of  care,  conscientiousness  and 
experience.  The  "  field  notes  "  of  an  appraisal  should  be  well  made 
and  preserved  for  other  possible  use,  as  in  court  review  which  is 
frequently  present  as  a  possibility. 

In  making  the  field  inventory,  the  inspectors  should  be  familiar 
with  the  apparatus  they  are  listing  so  that,  among  other  things 
they  can  form  some  approximate  idea  of  the  amount  of  depreci- 
ation undergone.  Before  the  reports  are  made  use  of,  however, 
some  of  the  most  experienced  engineers  in  charge  generally  study 


56  PUBLIC   UTILITY  RATES 

at  least  the  important  parts  of  a  plant  to  arrive  at  an  idea  of 
the  life  and  depreciation  of  the  apparatus. 

Unit  Prices.  —  Each  property  item  reported  as  in  service  or 
available  needs  to  have  its  number  of  property  units  multiplied 
by  "unit  prices"  to  get  the  physical  cost.  These  unit  prices, 
it  is  now  generally  accepted  in  finding  a  present  value  for  rate 
making,  should  be  prices  of  today  —  or  the  average  of  the  last 
5  to  10  years  for  fluctuating  data.  Combining  present  prices 
and  old  pieces  of  property  seems  to  many  doubtless  to  introduce 
an  inconsistency  into  the  whole  procedure.  Yet  sometimes  the 
original  charges  are  no  longer  procurable,  and  if  the  official  direc- 
tions to  appraisers  are  to  obtain  present  cost  of  reproducing  the 
still  existing  old  property  items,  then  no  other  procedure  is  more 
logical.  It  has  been  often  argued  that  it  is  the  height  of  incon- 
sistency to  figure  reproduction  cost  taking  into  account  historical 
facts  of  the  course  of  construction  and  then  using  unit  prices  of 
today.  Yet  that  inconsistency  diminishes,  or  fades  entirely, 
when  we  see  that  this  is  but  a  labor-saving  way  of  attaining  the 
equivalent  present  value  —  instead  of  reproducing  a  plant  under 
old  unit  prices  and  then  adjusting  the  whole  value  to  present 
prices  in  the  endeavor  to  approximate  present  worth. 

Unit  prices  in  but  few  cases  are  all  fixed  by  men  of  such  expe- 
rience that  the  figures  do  not  have  to  be  selected  for  a  case  after 
careful  comparison  and  consultation  of  the  appraisal  staff.  Un- 
less care  is  taken  peculiarities  may  creep  in  to  discredit  the  ap- 
praisal. 

Some  unit  prices,  as  those  taken  from  contracts,  will  show  a 
contractor's  profit  of  5  to  20%  and  when  such  units  are  used  this 
should  be  clearly  expressed  so  that  later  the  aggregate  costs 
may  not  be  increased  by  amounts  intended  to  cover  contractors' 
work.  In  rare  cases,  the  unit  prices  used  may  have  been  changed 
to  show  appreciation  or  depreciation,  and  the  value  then  secured 
by  appraisal  is  not  simple  reproduction  cost.  Such  situations  must 
be  guarded  against.  In  some  appraisals  the  inventories  and  unit 
prices  cover  the  overhead  costs  of  plant  development  commonly 
included  under  going-concern  value.  In  the  Des  Moines  Gas  case 
before  the  U.  S.  Supreme  Court  this  procedure  was  held  to  pre- 
vent further  entrance  of  going-concern  value. 

Short  Cuts  in  Appraisals.  —  Brief  mention  has  been  made  of 
the  possibility  of  lowering  the  cost  of  appraisals  and  of  the  work 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  57 

done  by  the  Inspection  Department  of  the  Associated  Factory 
Mutual  Fire  Insurance  Companies.  The  practice  of  this  organ- 
ization is  based  on  the  argument  that  it  is  inconsistent  to  in- 
ventory the  material  of  a  building  and  the  machinery  in  a  plant 
to  the  last  minute  detail  while  only  the  value  of  the  different 
standard  materials  and  machines  can  be  as  accurately  secured, 
while  large  costs  of  waste,  labor,  erection  and  contingencies 
have  to  be  gross  estimates,  and  while  depreciation  in  value  is 
largely  guessed  at.  Therefore  the  detail  to  which  a  given  part 
of  a  works  is  inventoried  by  these  insurance  appraisers  depends 
on  the  percentage  which  that  part  may  be  expected  to  have 
of  the  value  of  the  whole  works.  In  such  ways  large  manu- 
facturing establishments  have  been  appraised  by  a  few  days 
work  in  the  field  and  an  equal  time  in  the  office.  These  valu- 
ations have  been  free  —  being  a  part  of  the  insurance  work  — 
but  they  have  been  accepted  for  cost  accounting,  etc.,  by  the 
assured  concerns  some  of  whom  have  compared  the  results 
with  old-school  appraisals.  Such  rapid  valuations  have  not 
generally  come  before  the  courts,  but  the  methods  have  been 
supported  satisfactorily  in  court  in  a  couple  of  instances. 

It  is  the  practice  of  this  bureau  first  to  divide  a  manufactur- 
ing plant  into  buildings  and  machinery;  elevators,  piping  and 
all  things  that  can  be  removed  without  altering  the  building 
are  classed  as  machinery.  The  floor  areas  and  type  of  con- 
struction of  buildings  are  noted  and  valuation  made  on  a  basis 
of  square  feet  of  floor  area,  using  the  cost  tables  of  C.  T.  Main  * 
as  a  basis  for  the  length -width-height  relations. 

The  machinery  is  subdivided  into  machine  units,  shafting, 
belting,  piping,  electric  wiring,  and  furniture  and  miscellaneous 
equipment.  These  items  are  inventoried  with  notation  of  only 
such  dimensions  and  description  as  show  trade  sizes  and  lead 
to  location  of  unit  value.  Thus  "  1  engine  lathe  14  X  6  comp. 
taper  "  designates  a  lathe  with  14-inch  swing,  6-foot  bed  over 
all,  screw  cutting,  no  special  gearing,  compound  rest  and  taper 
attachment.  All  modern  power  machines  (engines,  turbines, 
motors,  generators,  etc.)  carry  a  name  plate  giving  the  needed 
information,  except  that  sometimes  speed,  cylinder  diameter 

*  Given  first  in  a  paper  before  the  New  England  Cotton  Manufacturer's 
Association,  April,  1904;  revised  to  January,  1910,  in  the  article  "Approxi- 
mate Cost  of  Mill  Buildings,"  Engineering  News,  Jan.  27, 1910  (see  Appendix). 


58  PUBLIC  UTILITY  RATES 

and  length  of  stroke  of  engines  and  pumps  have  to  be  noted. 
Boilers  and  piping  are  appraised  by  rated  horsepower.  Stand- 
ard machines  are  appraised  by  current  price  lists,  special  ma- 
chines by  experience  or  quotation.  Such  prices  are  increased 
5  to  10%  to  cover  transportation  and  erection.  Of  the  total 
value  of  the  buildings  and  contents,  the  value  of  buildings  and 
fixed  machines  amounts  ordinarily  to  more  than  half  so  that 
short  cuts  based  on  averaged  experience  are  justified  for  the 
minor  items. 

Lengths  of  shafting  are  measured  and  priced  per  foot  erected 
and  equipped.  Main  belts  are  measured  by  eye;  an  addition 
in  value  of  a  machine  unit  for  its  machine  belts  is  made,  there 
being  several  groups.  Steam,  hot-water,  and  gas  piping  —  for 
heating  and  lighting  —  and  automatic-sprinkler  pipes  are  cov- 
ered by  an  allowance  of  so  many  cents  per  square  foot  of  floor 
area.  The  manufacturing-service  piping  for  steam,  water,  gas, 
oil  and  air  is  covered  by  per-machine  and  per-horsepower  charges, 
cross  checked.  Electric  wiring  is  valued  per  light  and  per  motor 
horsepower,  actual  figures  depending  on  the  type  of  lamp,  and 
on  grouping  the  motors  in  size  groups. 

From  the  experience  of  this  bureau  extending  over  many 
years,  figures  have  been  made  of  total  costs  per  main  machine 
unit  —  per  spindle  in  a  cotton  mill,  per  pair  of  cards  in  a  woolen 
mill  and  per  square  foot  of  floor  space  or  per  producing  machine 
in  a  standard  plant  so  that  still  quicker  approximation  can  be 
had,  when  necessary. 

The  bureau's  practice  in  regard  to  depreciation  is  to  assume 
that  where  a  building  is  over  three  or  four  years  old,  is  plumb 
and  in  good  repair  and  adequate,  the  depreciation  stands  con- 
stant for  several  years  at  5%  of  total  first  value.  On  machin- 
ery 2  to  5%  is  deducted  for  each  year  of  a  main  unit's  life. 
Some  special  machines  have  depreciation  figured  on  wearing 
parts  only.  Depreciation  of  shafting  is  not  recognized;  ^  drop 
is  allowed  on  belting  as  a  whole.  On  piping  a  total  of  10%  is 
the  usual  limit. 

This  work  has  been  in  industrial  works  but  most  of  these 
have  water,  steam,  electricity,  or  gas  plants  so  that  the  general 
applicability  of  the  plan  has  been  tested.  It  is  considered  by 
the  department  that  even  less  detail  than  noted  would  be  re- 
quired in  a  pure  utility  plant  —  owing  to  the  concentration  of 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  59 

values  in  a  few  large  machine  units,  etc.  It  is  obvious  that 
parts  of  a  plant  thus  appraised  are  treated  as  conforming  to 
the  average  worth  of  similar  parts  in  other  works  —  unusual 
contingencies  and  extreme  peculiarities  have  no  effect.  The 
success  of  such  appraisals  depends  upon  how  complete  are  the 
appraiser's  records  of  plant  costs  —  upon  how  closely  they  rep- 
resent true  averages  of  present  values. 

Appraisal  of  Real  Estate.  —  A  fair  procedure  for  land  valu- 
ation, known  as  the  sales  method,  has  been  extensively  employed 
with  apparent  general  satisfaction  by  the  Wisconsin  Railroad 
Commission  and  is  discussed  at  length  in  an  early  case  (State 
Journal  Printing  Co.,  v.  Madison  Gas  and  Electric  Co.,  March, 
1910).  Yet  it  is  stated  (p.  528),  that  it  is  only  a  valuable  aid  to 
the  judgment  of  the  experts.  A  part  of  the  opinion  reads: 

The  sales  method  may  be  defined  as  a  plan  or  process  for  the  systematic 
collection  and  comparison  of  data  relating  to  real-estate  transfers  for  the 
purpose  of  estimating  true  market  realty  values.  It  consists  in  a  study 
of  the  transfers  of  neighboring  property  having  conditions  or  character- 
istics similar  to  the  land  whose  value  is  to  be  determined  and  it  is  intended 
to  duplicate  as  nearly  as  may  be  the  mental  or  judicial  processes  ordi- 
narily employed  by  the  so-called  "local  real-estate  expert,"  with  a  view 
to  arriving  at  results  approximating  those  which  would  be  reached  by 
such  local  experts  acting  without  bias  or  suggestion.  Two  interpretations 
of  the  sales  method  have  been  most  commonly  employed.  In  one  of 
these,  the  area  and  consideration  in  each  sale  of  similarly  situated  land 
is  found,  the  average  unit  price  (per  square  foot,  per  foot  frontage,  per 
lot,  per  acre,  etc.)  ascertained,  and  this  unit  applied  to  the  tract  under 
investigation.  The  other  application  introduces  what,  in  many  cases,  is 
believed  to  be  an  additional  safeguard,  consisting  in  the  use  of  the  aver- 
age assessed  value  of  adjacent  or  similarly  situated  lands  in  combination 
with  an  average  ratio  representing  the  relationship  of  the  assessed  value 
of  transferred  lands  to  the  final  consideration  paid  for  such  lands  —  all 
figures  being  based  on  "ground  values,"  exclusive  of  improvements 
thereon.  In  the  broader  and  more  flexible  applications  of  the  sales 
method,  the  expert  adopts  one  or  the  other  of  the  processes  outlined  or 
blends  the  two  in  such  fashion  as  to  yield  the  most  consistent  and  trust- 
worthy final  result. 

In  view  of  the  close  similarity  as  to  fundamental  basis  of  the  sales  and 
local  expert  methods,  particular  interest  and  importance  attaches  to  any 
specific  cases  affording  a  direct  comparison  of  actual  valuation  results  by 
the  two  methods  made  under  normal  conditions.  Fortunately,  the  re- 
sults of  two  such  comparisons  are  available,  one  involving  some  300 


60  PUBLIC  UTILITY  RATES 

blocks,  or  over  3  square  miles,  of  representative,  residential  property,  in 
St.  Paul;  the  other  of  some  500  acres  of  valuable  railway-terminal  lands, 
in  Milwaukee. 

The  St.  Paul  investigation  was  made  by  Mr.  T.  A.  Polleys  who  con- 
ceived of  a  plan  to  test  the  sales  method  of  valuing  lands.  A  district  in 
the  westerly  portion  of  St.  Paul  was  selected  for  reason  that  the  great 
activity  for  several  preceding  years  would  insure  ample  sales  data  and 
because  of  the  representative  characteristics  of  the  territory.  The 
average  ground  values  per  foot  front  was  ascertained  by  a  flexible  ap- 
plication of  the  sales  method,  chiefly  by  Mr.  Polleys  personally  who  then 
requested  some  14  highly  qualified  real-estate  experts  to  submit  their 
estimates  of  the  same  values.  To  arouse  interest  in  the  investigation 
Mr.  Polleys  charted  his  determinations  and  submitted  copies  to  the  ex- 
perts with  the  urgent  request  however,  that  they  should  not  be  in- 
fluenced thereby.  The  experts  served  without  compensation,  acted 
independently  and  were  free  of  suggestion  in  preparing  their  estimates. 
...  It  was  seen  that  the  tendency  of  the  sales  method  was  to  give 
deficient  results  to  an  average  amount  of  3.8%. 

This  result  is  strikingly  confirmed  by  the  valuation  of  terminal  lands 
of  the  Chicago,  Milwaukee  &  St.  Paul  Ry.,  in  Milwaukee,  in  1903,  under 
the  auspices  of  the  Tax  Commission.  The  lands  amounted  to  upwards 
of  500  acres,  scattered  through  some  15  wards  and  having  an  aggregate 
valuation  of  approximately  $6,000,000.  The  market  value  of  these 
railroad  lands  was  determined  by  specially  qualified  local  experts  under 
the  direction  of  Mr.  F.  W.  Adams,  secretary  of  the  railway  company. 
The  state  valuation  staff,  under  the  direction  of  Prof.  W.  D.  Taylor, 
engineer  for  the  state  board  of  assessment,  used  the  sales  method  on  a 
basis  consistent  with  local  conditions.  The  final  results  differed  by 
only  3.5%,  those  by  the  sales  method  being  lower. 

Cost  of  Condemnation.  —  It  is  common  experience  that  the 
cost  of  acquiring  real  estate  for  an  utility  concern  has  been  two 
or  three  times  the  preliminary  valuation  based  on  market  value 
of  contiguous  property.  This  is  caused  in  part  by  the  necessary 
expenses  of  searching  for  most  suitable  grounds,  the  destruction 
of  existing  buildings,  and  oftentimes  the  premium  which  must 
be  paid  to  induce  sale  from  persons  either  not  anxious  to  part  with 
the  land  or  suspecting  the  purchasers'  purpose  and  desirous  of 
securing  maximum  advantage  from  the  transaction.  If  the  right 
of  eminent  domain  be  used  there  still  are  large  additional  expenses 
incurred  for  engineers  and  lawyers,  for  damages  to  plots  cut  in 
two  and  to  various  other  adjacent  lands. 

An  instance  has  been  cited  (1914  Report,  Valuation  Committee, 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  61 

Am.  Soc.  C.  E.),  of  the  Wachusett  Reservoir  of  the  Boston  Metro- 
politan Water  Works.  Experts  made  the  preliminary  valuation 
of  the  4772  acres  with  buildings  at  $697,000.  The  actual  aggre- 
gate price  of  the  property  acquired  was  $1,182,000,  or  69%  in 
excess,  and  this  was  under  right  of  eminent  domain.  The  over- 
head costs  of  the  takings  (estimated  at  15%)  were  not  included. 

Generally,  it  seems  to  be  recognized  as  good  practice  to  pay 
up  to  two  or  three  times  the  common  market  price  of  similar  but 
unaffected  lands  rather  than  enter  upon  condemnation  litigation 
and  delays.  The  point  is  that  under  either  bargaining  or  con- 
demnation there  are  items  of  heavy  expense  and  owners'  demands 
not  disclosed  by  either  prior  or  subsequent  examination  of  the 
lands.  These  increments  of  expected  cost  are  not  covered,  either, 
by  the  ordinary  overhead  allowances  of  construction  engineering, 
contingencies,  etc. 

Where  the  utilities  have  not  the  right  of  condemnation,  as  in 
the  case  of  certain  eastern  electricity-transmission  companies,  and 
the  corporation  has  to  rely  on  its  own  bargaining,  there  may  be  a 
genuine  " hold-up"  even  for  easements.  Of  course,  such  excessive 
costs  are  legitimate  and  essential  matters  for  capitalization.  But 
if  possible  the  generation  that  imposed  them  on  the  utility  should 
obliterate  them  through  amortization  contributions  and  a  corre- 
sponding reduction  of  the  ratio  of  capital  to  tangible  property. 

Denial  of  Condemnation  Cost.  —  Some  consternation  has 
been  produced  among  utilities  by  the  so-called  Minnesota  Rate 
Cases  (230  U.  S.  352;  June,  1913)  in  which  railroad  terminal -prop- 
erties in  St.  Paul,  Minneapolis,  and  Duluth  were  not  admitted  to 
have  a  value  as  much  above  the  market  value  of  contiguous  prop- 
erty as  railroad  properties  generally  are  known  to  cost  above  market 
price.  However,  it  is  only  fair  to  note  that  the  eminent  justice's 
opinion  relates  only  to  the  cases  in  hand  where  the  railways  had 
been  long  established,  the  contiguous  property  largely  enhanced 
by  the  presence  of  the  railways,  and  the  actual  increase  of  price 
above  original  market  value  so  far  hidden  in  the  dim  past  that 
its  study  was  largely  conjecture. 

It  is  interesting  to  note  the  language  of  this  decision;  it  states 
that  railroads  have  been  given  the  right  of  eminent  domain  so 
that  their  necessities  may  not  be  played  upon  to  secure  more  than 
market  value  of  land  taken.  However,  this  reasoning  must  not 
yet  be  carried  as  a  precedent  too  far  afield  of  the  specific  applica- 


62  PUBLIC  UTILITY  RATES 

tion  in  these  cases;  it  would  be  expected  that  for  cases  when  the 
actual  cost  of  taking  the  land  was  not  mere  conjecture,  the  court 
would  receive  evidence  of  that  cost  in  a  case  at  hand  and  in  similar 
cases.  The  point  to  be  observed  is  that  where  the  contiguous 
property  values  rise  because  of  the  presence  of  the  utility,  then 
the  rising  value  of  the  railroad  land  cannot  be  expected  always  to 
outstrip  the  market  value  of  the  contiguous  parcels.  The  mis- 
cellaneous items  of  condemnations  —  engineering,  superintend- 
ence, legal  expense,  contingencies,  etc.,  according  to  this  decision, 
are  to  be  regarded  as  absorbed  in  the  general  rise  of  value  if  that 
has  carried  present  worth  very  much  above  original  total  cost. 
The  decision  runs: 

It  is  clear  that  in  ascertaining  the  present  value  we  are  not  limited  to 
the  consideration  of  the  amount  of  the  actual  investment.  .  .  .  The 
property  is  held  in  private  ownership  and  it  is  that  property,  and  not  the 
original  cost  of  it,  of  which  the  owner  may  not  be  deprived  without  due 
process  of  law. 

Assuming  that  the  company  is  entitled  to  a  reasonable  share  in  the 
general  prosperity  of  the  communities  which  it  serves,  and  thus  to  at- 
tribute to  its  property  an  increase  in  value,  still  the  increase  so  allowed, 
apart  from  any  improvements  it  may  make,  cannot  properly  extend  be- 
yond the  fair  average  of  the  normal  market  of  land  in  the  vicinity  having 
a  similar  character.  Otherwise  we  enter  the  realm  of  mere  conjecture. 

Value  of  Adaptability.  —  Special  value  for  land  because  of 
its  inherent  adaptability  for  reservoirs,  wells,  dams,  railways, 
power  stations,  etc.,  has  often  been  claimed  and  numerous  de- 
cisions are  to  be  found  both  for  and  against  such  allowances. 

The  U.  S.  Supreme  Court  in  the  Minnesota  Rate  Cases  has  this 
to  say  about  such  an  element  of  value: 

It  is  urged  that,  in  this  view,  the  company  would  be  bound  to  pay  the 
"railway  value"  of  the  property.  But,  supposing  the  railroad  to  be 
obliterated  and  the  lands  to  be  held  by  others,  the  owner  of  each  parcel 
would  be  entitled  to  receive  on  its  condemnation  its  fair  market  value  for 
all  its  available  uses  and  purposes.  If,  in  the  case  of  any  such  owner,  his 
property  had  a  peculiar  value  or  special  adaptation  for  railroad  purposes, 
that  would  be  an  element  to  be  considered.  But  still  the  inquiry  would 
be  as  to  the  fair  market  value  of  the  property;  as  to  what  the  owner  had 
lost,  and  not  what  the  taker  had  gained.  The  owner  would  not  be  en- 
titled to  demand  payment  of  the  amount  which  the  property  might  be 
deemed  worth  to  the  company;  or  of  an  enhanced  value  by  virtue  of  the 
purpose  for  which  it  was  taken;  or  of  an  increase  over  its  fair  market 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  63 

value,  by  reason  of  any  added  value  supposed  to  result  from  its  combi- 
nation with  tracts  acquired  from  others  so  as  to  make  it  a  part  of  a  con- 
tinuous railroad  right-of-way  held  in  one  ownership. 

Other  cases  like  McGovern  v.  N.  Y.  (130  App.  Div.,  N.  Y.  350, 
356),  sustained  by  the  U.  S.  Supreme  Court  on  account  of  the  dis- 
cretion allowed  the  trial  court,  indicate  that  if  special  value  is 
not  recognized  until  the  utility  starts  its  initial  proceedings,  then 
it  could  not  be  secured  on  condemnation. 

Value  for  Paving  Over  Mains.  —  One  of  the  controversial 
matters  in  appraisal  is  what  has  already  been  incidentally  noted 
as  "value  of  paving  over  mains."  On  the  one  hand,  there  are 
those  who  argue  that  if  improved  paving  has  been  put  down  since 
the  pipes,  conduits  or  other  underground  structures,  then  the 
value  of  the  mains  has  increased  according  to  what  it  would  cost 
to  put  them  down  under  the  new  conditions.  The  theory  by 
which  this  is  defended  seems  to  be  that  a  strict  adherence  to  the 
cost-of-reproduction  method  of  valuation  necessitates  reproduc- 
ing all  such  actual  conditions  rather  than  giving  any  weight  to 
former  conditions. 

On  the  other  side  of  this  question  are  those  who  argue  that  this 
is  unreasonable  —  even  verging  on  extortion.  It  is  obvious  that 
the  company  necessarily  has  been  passive,  so  far  as  improving  the 
pavements,  while  the  city  has  presumably  been  active.  The 
net  result  is  that  the  more  money  the  city  puts  into  the  pave- 
ments, etc.,  the  more  the  citizens  have  to  pay  for  the  same  old 
utility  service.  One  reason  for  denying  this  value  is  discussed 
under  increments  and  decrements  of  value  above. 

Those  who  contended  for  maximum  allowances  for 'improved 
paving  over  mains  for  years  relied  on  the  Supreme  Court  opinion 
in  the  Consolidated  Gas  Case  (212  U.  S.,  19;  Jan.,  1909),  support- 
ing in  general  the  findings  of  a  lower  court  which  had  admitted 
the  cost  of  new  paving  over  old  gas  mains  in  New  York  City. 
The  precarious  nature  of  this  foundation  is  seen  from  one  para- 
graph in  the  Supreme  Court  opinion. 

And  we  concur  with  the  court  below  in  holding  that  the  value  of  the 
property  is  to  be  determined  as  of  the  time  when  the  inquiry  is  made  re- 
garding the  rates.  If  the  property  which  legally  enters  into  the  consider- 
ation of  the  question  of  rates  has  increased  in  value  since  it  was  acquired, 
the  company  is  entitled  to  the  benefit  of  such  increase.  This  is,  at  any 
rate,  the  general  rule.  We  do  not  say  there  may  not  possibly  be  an  ex- 


64  PUBLIC  UTILITY  RATES 

ception  to  it  where  the  property  may  have  increased  so  enormously  in 
value  as  to  render  a  rate  permitting  a  reasonable  return  upon  such  in- 
creased value  unjust  to  the  public.  How  such  facts  should  be  treated 
is  not  a  question  now  before  us,  as  this  case  does  not  present  it. 

Those  who  stood  out  against  excess  cost  of  paving  over  mains, 
relied  on  the  Supreme  Court  in  the  Cedar  Rapids  Gaslight  Case 
(223  U.  S.  665),  which  generally  supported  a  lower  court  in  deny- 
ing excess  value  but  did  not  specifically  mention  the  topic.  The 
intention  of  the  Supreme  Court  to  sanction  including  cost  of  new 
paving  over  old  mains  was  denied  by  the  highest  New  York  State 
court  in  the  Kings  County  Lighting  Case  (N.  Y.  Public  Service 
Comm.,  First  District,  No.  1273;  People  ex.  rel.  Kings  County 
Lighting  Co.  v.  Wilcox  et  al.;  March,  1914).  The  leading  state- 
ment runs  thus: 

The  relator  is  entitled  to  a  fair  return  on  investment  not  on  improve- 
ments made  at  public  expense.  The  case  is  not  parallel  to  the  so-called 
unearned  increment  of  land.  That  the  company  owns.  It  does  not  own 
pavements,  and  the  laying  of  them  does  not  add  to  its  investment  or 
increase  the  cost  to  it  of  producing  gas.  On  one  hand,  cost  of  reproduc- 
tion less  accrued  depreciation  should  not  be  so  applied  as  to  deprive  the 
corporation  of  a  fair  return  at  all  tunes  on  reasonable,  proper  and  neces- 
sary investment  made  by  it  to  serve  the  public,  and  on  the  other  side  it 
should  not  be  so  applied  as  to  give  the  corporation  a  return  on  improve- 
ments made  at  public  expense  which  in  no  way  increase  the  cost  to  it  of 
performing  that  service. 

The  question  has  been  definitely  settled  by  the  Supreme  Court 
in  the  Des  Moines  Gas  Case  (438  U.  S.  153;  P.  U.  R.  1915  D, 
577;  June,  1915).  The  Court  did  not  state  any  new  ideas  on  the 
subject  but  accepted  and  promulgated  the  views  of  the  court  below 
and  the  master  in  chancery,  thus: 

As  to  the  item  of  $140,000,  which,  it  is  contended,  should  be  added  to 
the  valuation,  because  of  the  fact  that  the  master  valued  the  property  on 
the  basis  of  the  cost  of  reproduction  new,  less  depreciation,  and  it  would 
be  necessary  in  such  reproduction  to  take  up  and  replace  pavements  on 
streets  which  were  unpaved  when  the  gas  mains  were  laid,  in  order  to  re- 
place the  mains,  we  are  of  the  opinion  that  the  court  below  correctly  dis- 
posed of  this  question.  These  pavements  were  already  in  place.  It  may 
be  conceded  that  they  would  require  removal  at  the  time  when  it  became 
necessary  to  reproduce  the  plant  in  this  respect.  The  master  reached 
the  conclusion  that  the  life  of  the  mains  would  not  be  enhanced  by  the 
necessity  of  removing  the  pavements,  and  that  the  company  had  no 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  65 

right  of  property  in  the  pavements,  thus  dealt  with,  and  that  there  was 
neither  justice  nor  equity  in  requiring  the  people  who  had  been  at  the 
expense  of  paving  the  streets  to  pay  an  additional  sum  for  gas  because 
the  plant,  when  put  in,  would  have  to  be  at  the  expense  of  taking  up  and 
replacing  the  pavements  in  building  the  same.  He  held  that  such  added 
value  was  wholly  theoretical,  when  no  benefit  was  derived  therefrom. 
We  find  no  error  in  this  disposition  of  the  question. 

Value  of  Franchises.  —  Under  administration  expense  has 
been  mentioned  the  cost  of  obtaining  franchises. 

But  when  nothing  is  paid  for  the  franchise  public  opinion  is 
against  entering  any  value  for  it  in  the  appraisal  of  worth  for 
rate  making.  That  cannot  be  said  to  apply  to  appraisal  for  pur- 
chase since  then  the  company  rightfully  could  expect  to  receive 
compensation  for  expected  profits  during  the  rest  of  the  franchise 
life.  In  adding  franchise  value  to  rate-basis  worth,  if  at  all,  the 
history  of  the  company  should  be  consulted  particularly  to  see  if 
the  communities  definitely  held  out  prospects  of  extra  profits 
over  interest,  risk,  etc.,  on  actual  investment.  More  and  more 
the  franchises  now  granted  are  stripped  specifically  of  such  pos- 
sible value  at  their  granting;  but  the  terms,  expressed  or  implied, 
in  existing  grants  need  to  be  studied  carefully  in  adjusting  rates 
that  unjustified  retroactive  punishment  is  not  meted  out. 

This  question  was  recently  (June,  1915)  decided  by  the  highest 
New  Jersey  court  (Errors  and  Appeals)  in  the  so-called  "Passaic 
90-c.  Gas  Case."  The  Public  Utilities  Commission  denied  a 
value  to  the  gas  company's  franchises,  beyond  cost  and  burden, 
and  the  state  supreme  court  sustained  it.  The  highest  court  at 
first  reversed  the  lower  court  but  on  a  rehearing  sustained  it. 
The  concurring  opinion  of  Justice  White  is  an  interesting  discus- 
sion of  the  idea  that  a  franchise  is  property  but  not  "used  and 
useful"  in  service.  A  part  of  the  opinion  is  given  below: 

Taking  up  the  second  proposition,  that  the  Company's  charter  right  to 
charge  reasonable  rates  is  in  itself  a  valuable  property  right  entitled  to 
consideration  in  rate  making,  I  suppose  it  must  be  conceded  that  the 
franchise  to  charge  as  a  "reasonable  rate,"  sufficient  to  yield  a  net  profit 
of  8%  on  the  value  of  the  Company's  property  as  allowed  and  established 
respectively  by  the  findings  of  the  Utilities  Commission  in  this  case,  is  a 
very  valuable  property  right.  Certainly  I  think  it  is.  That  this  valuable 
privilege  is  the  Company's  is  beyond  question.  That  it  is  property  is 
undoubted.  That  the  law  protects  it  against  confiscation  and  subjects  it 
to  taxation  follows  as  a  matter  of  course. 


66  PUBLIC  UTILITY  RATES 

But  that  this  valuable  property  right  to  charge  "reasonable  rates" 
should  by  virtue  of  its  own  existence  have  the  effect  of  converting  itself 
into  a  still  more  valuable  property  right  to  charge  "unreasonable  rates" 
is,  of  course,  preposterous.  Presumably  the  incorporators  went  into  this 
public  utility  business  because  they  expected  that  their  charter  privilege 
to  charge  "reasonable  rates"  for  the  gas  they  were  to  manufacture,  dis- 
tribute and  sell,  would  be  a  valuable  one,  but  that  fact  and  the  fact  that 
it  has  become  so,  cannot  have  the  effect  of  altering  the  terms  of  the  con- 
tract made  with  the  State. 

The  mere  statement  of  this  proposition  is  sufficiently  convincing,  but 
if  anything  more  were  needed,  a  glance  at  the  absurd  practical  result  of 
the  contrary  view  would  be  illuminating.  If  the  franchise  to  charge 
ninety  cents  in  order  to  pay  8%  on  the  value  of  the  Company^  prop- 
erty not  including  the  franchise  is  worth  a  million  dollars  and  must 
be  included  and  have  8%  paid  on  it  also,  the  rate  would  have  to  be  $1 
instead  of  90c.;  but  if  the  Company  has  the  property  right  to  charge 
$1,  the  franchise  is  worth  two  million  dollars  instead  of  one  million,  and 
so  the  rate  must  be  $1.10  in  order  to  pay  8%  on  this  additional  million, 
and  so  on  indefinitely. 

That  the  Company's  contract  with  the  State  to  charge  "reasonable 
rates"  cannot  be  thus  evaded,  is,  of  course,  quite  obvious.  The  plain 
fact  is  that  the  commercial  value  of  the  Company's  property  right  in  its 
franchise  can  have  no  effect  in  fixing  the  rate  it  can  charge,  because  by 
the  terms  of  its  contract  with  the  State  the  stream  of  its  franchise  value 
arises  from  the  spring  of  its  right  to  charge  "reasonable  rates,"  and  in  the 
very  nature  of  things  no  stream  can  rise  higher  than  its  source. 

Water  Rights  Must  be  Considered.  —  Greatly  varying  ideas 
are  prevalent  as  to  whether  or  not  a  public  utility  utilizing  a 
water  power  can  include  in  the  rate-basis  worth  of  its  plant  any 
allowance  for  rights  to  the  beneficial  use  of  water. 

This  has  been  denied  in  a  few  specific  cases,  notably  by  the 
Public  Service  Commission  for  the  Second  District  of  New  York 
in  Fuhrman  v.  Cataract  Power  and  Conduit  Co.  (3  N.  Y.  Pub.  Ser. 
Comm.  2nd  D.  670)  on  the  grounds  that  the  federal  and  state 
permission  to  use  water  at  Niagara  Falls  gave  the  corporation 
no  title  to  the  water  and  hence  no  water  right  measured  by  the 
price  of  steam  power.  Other  commissions,  for  instance,  like 
those  of  California  (re  No.  Calif.  Power  Co.,  Calif.  R.  R.  Comm. 
Rep.  1913)  and  Idaho  (re  Pocatello  Water  Co.  1  Idaho  Pub.  Serv. 
Comm.  Orders  78;  1914)  appear  to  have  held  at  one  time  that 
water  rights  were  in  the  nature  of  fictitious  intangibles  and  so  not 
admissible  as  part  of  rate-basis  worth. 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  67 

Later  ideas  of  both  these  bodies  named  (See  re  City  of  Santa 
Cruz,  Calif.  R.  R.  Comm.  2666;  P.  U.  R.  1915  F  768,  and  re 
Pocatello  Water  Co.,  Idaho  Supreme  Court,  150  Pac.  47;  P.  U.  R. 
1915  F  437)  show  a  different  attitude  for  in  both  cases  a  value 
for  the  rights  was  allowed. 

There  has  existed  little  doubt  anywhere  as  to  the  necessity  of 
giving  proper  attention  to  water  rights  since  the  United  States 
Supreme  Court  held  in  1914,  in  San  Joaquin  &  Kings  River 
Canal  &  Irrig.  Co.  v.  Stanislaus  County  (233  U.  S.  459),  that  in 
spite  of  a  declaration  in  the  California  Constitution  that  water 
appropriated  for  sale  was  appropriated  for  public  use,  the  benefit 
was  private  and  the  rights  thereto  should  be  considered  in  con- 
demnation and  rate  cases.  Mr.  Justice  Holmes  thus  speaks: 

But  it  is  said  that  as  the  plaintiff  appropriates  this  water  to  distri- 
bution and  sale,  it  thereby  dedicates  it  to  public  use  under  California 
law,  and  so  loses  its  private  right  in  the  same.  It  appears  to  us  that 
when  the  cases  cited  for  this  proposition  are  pressed  to  the  conclusion 
reached  in  the  present  case,  they  are  misapplied.  No  doubt  it  is  true 
that  such  an  appropriation  and  use  of  the  water  entitles  those  within 
reach  of  it  to  demand  the  use  of  a  reasonable  share  on  payment.  It 
well  may  be  true  that  if  the  waters  were  taken  for  a  superior  use  by  emi- 
nent domain  those  whose  lands  were  irrigated  would  be  compensated 
for  the  loss.  But  even  if  the  rate  paid  is  not  to  be  determined  as  upon  a 
purchase  of  water  from  the  plaintiff,  still,  at  the  lowest,  the  plaintiff  has 
the  sole  right  to  furnish  this  water,  the  owner  of  the  irrigated  lands 
cannot  get  it  except  through  the  plaintiff's  help,  and  it  would  be  unjust 
not  to  take  that  fact  into  account  in  fixing  the  rates.  ...  It  seems 
unreasonable  to  suppose  that  the  constitution  meant  that  if  a  party, 
instead  of  using  the  water  on  his  own  land,  as  he  may,  sees  fit  to  distribute 
it  to  others,  he  loses  the  rights  that  he  has  bought  or  lawfully  acquired. 

This  case  is  widely  quoted  as  controlling.  The  question  now 
is  not  whether  any  water  right  is  to  enter  rate  basis  but  how  much 
should  be  allowed.  The  hesitant  attitude  of  public  representa- 
tives as  to  amount  is  well  expressed  by  the  New  Hampshire  Public 
Service  Commission  when  it  states  (re  Grafton  El.  Light  &  Power 
Co.,  4  N.  H.  Pub.  Serv.  Comm.  Rep.  178) 

The  objection  of  the  Supreme  Court  to  the  conjectural  character  of 
the  cost  of  reproduction  method  [of  valuing  property  in  the  Minnesota 
Rate  Cases]  applies  with  equal  force  to  the  "saving-over-coal"  method 
of  valuing  water  power.  It  assumes,  what  is  not  proved,  that  power 


68  PUBLIC  UTILITY  RATES 

could  be  produced  profitably  by  coal,  and  it  assumes,  what  is  not  true, 
that  a  given  amount  of  power  produced  by  water  varying  in  amount  as 
it  will  on  even  the  best  regulated  streams  is  equal  in  value  to  a  like 
amount  of  power  generated  by  steam,  constant  and  reliable  at  all  times. 
We  live  in  a  region  remote  from  the  coal  fields,  the  cost  of  transporta- 
tion is  heavy,  and  the  price  of  coal  is  higher  than  in  almost  any  other 
part  of  the  country.  On  the  other  hand  ours  is  a  mountainous  state 
with  many  streams  having  a  large  fall  and  furnishing  an  abundance  of 
water  power,  much  of  which  is  still  undeveloped.  ....  A  f air  value  of  a 
water  power  in  New  Hampshire  cannot  be  a  value  which  takes  no  account 
of  our  natural  resources  and  makes  electricity  produced  by  water  as 
expensive  to  the  public  as  if  produced  by  coal. 

The  Vermont  Public  Service  Commission  also  expressed  the 
same  hesitancy  in  re  Montpelier  &  Barre  Light  &  Power  Co.  (No. 
452,  1916;  P.  U.  R.  1916  B  973),  as  follows: 

The  Commission,  however,  entirely  disapproves  of  this  method  of  de- 
termining the  value  of  water  rights  [by  direct  comparison  with  steam] 
because,  in  our  opinion  it  creates  a  value  which  may  be  largely  in  excess 
of  the  actual  value  of  the  rights  and  because  this  method,  if  applied  to 
rates,  would  entirely  deprive  the  consumer  of  any  benefits  to  which  he 
is  entitled  by  reason  of  having  these  natural  resources  at  hand. 

Better  Understanding  Needed  of  Water  Rights.  —  The  large 
amount  of  water-power  valuation  being  made  all  over  the  country, 
the  peculiar  results  being  presented  by  some  well-meaning  but 
uninstructed  appraisers  and  the  hesitation  of  Commissions  to 
accept  the  results  make  timely  a  review  of  defensible  procedure 
in  water-rights  appraisal.  Valuations  that  can  be  criticized 
are  those,  for  example,  which  set  forth  the  worth  of  water  rights 
as  the  "combined  intangible  and  going  values  of  a  power  develop- 
ment" •  —  locating  this  as  the  capitalized  possible  net  annual  in- 
come. Such  a  finding  has  no  justification  for  parading  as  the 
value  of  water  rights,  although  water  rights  indeed  are  hidden 
therein. 

At  the  outset  it  should  be  stated  that  authorities  are  universally 
agreed  that  water  rights  are  property  having  essentially  the 
nature  of  real  estate  —  industrial  real  estate.  Therefore,  they 
are  valuable  in  accordance  with  their  power  to  produce  income. 

The  Idaho  Commission  in  valuing  the  water  rights  of  a  hydro- 
electric company  (Taylor  v.  N.  W.  Light  &  Water  Co.;  Idaho 
Pub.  Util.  Comm.  Order  297;  P.  U.  R.  1916  A  372)  refused  to 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  69 

allow  a  value  where  it  transpired  that  the  company  could  pur- 
chase cheaper  than  it  could  develop  power. 

But  this  value  of  earning  power  must  be  separated  from  the 
common  intangible  values  also  generally  recognized  by  their 
earning  power  or  by  investment.  Even  where  such  procedure 
is  followed,  the  greatest  variation  is  seen  in  the  results  of  its  use 
by  different  persons.  The  appraiser  with  sympathies  running 
in  one  direction  seems  apt  to  make  value  large  enough  to  com- 
pensate the  holder  for  amounts  more  desired  than  supported  by 
fact.  .The  appraiser  of  opposite  sympathies  seems  to  minimize 
the  value  of  water  rights  where  these  can  be  construed  as  depend- 
ing to  any  measure  on  public  grants.  As  is  usual  on  such  con- 
troversial matters,  the  actual  truth  in  any  specific  case  generally 
resides  in  a  somewhat  indefinite  middle  ground  and  can  be 
approximated  only  by  the  exercise  of  good  judgment  as  well  as 
the  study  of  specific  data. 

Rights  as  Real  Estate.  —  If  water  rights  are  essentially  of 
the  nature  of  real  estate  it  would  be  expected  that  they  should 
be  valued  like  real  estate  by  the  direct  comparison  of  sales. 
However,  this  method,  in  simple  form,  is  extremely  restricted 
for  the  study  of  water-power  rights;  exchanges  are  extremely 
few  in  number  compared  with  the  parcels  of  land  that  are 
traded  every  year.  Moreover,  in  comparing  the  values  of  real 
estate  it  is  essential  to  take  into  account  transfers  of  land  in  the 
immediate  vicinity  of  the  parcels  studied.  That  seldom  is  pos- 
sible in  the  case  of  water  powers,  and  in  making  any  direct 
comparison  of  sales  the  geographical  separation  usually  will  be 
sufficient  seriously  to  impair  the  validity  of  the  appraisal — 
unless  such  effects  as  different  cost  of  development,  different 
annual  return,  different  market  conditions  and  different  probable 
net  profit  are  brought  into  play.  But  the  handicap  of  geographi- 
cal separation  may  be  overcome  by  scientific  analysis  preceding 
the  attempt  at  comparison. 

Splitting  the  Value  of  Rights.  —  Water  rights,  it  has  been  stated 
already,  exhibit  the  peculiarities  of  industrial  real  estate  in  that 
the  value  depends  on  utility  for  special  service.  Indeed  con- 
solidated water  rights  may  be  regarded  as  the  enhancement  of 
value  of  land  well  situated  for  the  special  use  of  generating 
power  from  falling  water,  etc.  The  enhancement  from  these 
special  uses  is  far  greater  than  the  value  of  the  real  estate  for 


70  PUBLIC  UTILITY  RATES 

all  the  ordinary  uses  of  land,  so  that  the  common  value  of  the 
tracts  is  generally  neglected  as  inconsequential. 

This  enhancement  consists  of  two  elements  of  value,  the 
first  depending  on  the  physical  conditions  which  lead  to  ease  or 
difficulty  (measured  by  expense)  of  developing  the  rights.  The 
second  depends  on  the  demand  for  water  or  power  in  the  locality, 
and  the  kind  and  cost  of  power  that  predominates  to  rule  the 
market.  The  two  values  are  not  wholly  independent  for  where 
there  is  competition  with  steam  power,  the  second  element  in- 
creases with  any  decrease  in  cost  of  development. 

These  value  factors  we  may  call*  "constructional"  and 
"regional."  In  case  either  factor  is  zero,  the  value  of  the  water 
rights  is  zero.  For  instance  the  many  water  powers  hundreds  of 
miles  back  from  even  moderately  populous  areas  have  little  or  no 
regional  value  at  present,  and  the  value  of  the  water  rights  is 
inappreciable  in  spite  of  possible  high  constructional  value.  The 
numerous  waterpowers  of  the  Adirondack  region  of  New  York 
have  no  local  market  and  cannot  be  completely  developed  to  com- 
pete profitably  with  steam  power  in  the  metropolitan  markets; 
the  regional  value  is  low.  If  it  were  sought  to  dam  the  Hudson 
River  and  develop  power  anywhere  near  New  York  City  the 
regional  value  would  be  great  but  constructional  value  obviously 
would  be  zero,  so  great  would  be  the  legal,  engineering  and 
financial  obstacles. 

Comparing  Two  Rights.  —  If  an  engineer  has  data  in  hand 
on  the  sale  prices  of  scattered  water  rights,  the  unknown  value 
of  a  questioned  private  water  right  can  be  approximated  by 
increasing  or  decreasing  the  known  value  in  proportion  to  (1)  the 
size  of  the  possible  development,  (2)  the  difference  in  regional 
value  and  (3)  the  difference  in  constructional  value.  Much  the 
same  sort  of  scheme  would  be  employed  by  an  experienced 
engineer,  the  rights  of  actual  scattered  plants  taken  before  for 
comparison  being  replaced  by  those  of  an  ideal  normal  plant 
existing  in  the  mind  of  the  appraiser.  It  might  be  thought  that 
the  problem  could  be  approached  also  by  setting  up  for  com- 
parison a  hypothetical  plant  of  the  specific  local  capacity,  built 
under  local  hydraulic  data  but  under  fixed  difficulties  and  at 
specific  cost,  and  finally  having  a  specific  market  and  specific 

*  Following  the  nomenclature  employed  by  Robert  E.  Horton,  Consulting 
Engineer,  Albany,  N.  Y.,  in  recent  cases. 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  71 

income.  For  such  a  plant  there  could  be  computed  a  net  income 
and  the  water  rights  would  depend  on  this  —  being  in  the  nature 
of  real  estate  which  is  valued  by  its  earning  power.  Then  the 
real  water  rights  could  be  approximated  by  changing  this  value 
to  accord  with  greater  or  less  construction  difficulties  which 
developed,  and  for  more  or  less  favorable  market  conditions 
which  arose.  But  this  last  study  reduces  more  or  less  to  a  direct 
appraisal  by  earning  capacity. 

Valuation  of  Rights  by  Earning  Capacity.  —  Where  there  is 
not  dependable  data  for  the  method  of  appraisal  by  sales  com- 
parison, it  is  necessary  to  fall  back  upon  an  earning-capacity 
study.  At  the  outset  it  is  necessary  to  start  with  the  query: 
What  sum  could  an  intending  purchaser  afford  to  pay  for  con- 
solidated water  rights  going  with  a  diversion  for  power  or  water- 
supply,  knowing  the  gross  income  which  the  power  or  water 
will  bring,  knowing  that  certain  fixed  charges,  interest  and  taxes 
must  be  paid  on  the  full  investment  —  including  land  and  water 
rights  and  the  cost  of  plant  and  business  development?  All 
the  factors  entering  into  the  solution  of  the  problem  are  known 
but  one  —  water  rights  —  and  the  answer  is  therefore  ascer- 
tainable. 

On  the  basis  of  earning  capacity,  the  capitalized  net  profit  is 
equal  to  the  cost  of  the  physical  plant  and  going-concern  value 
(the  latter  estimated  for  an  undeveloped  business  by  any  of  the 
acceptable  methods)  plus  the  water  rights  in  question.  The  net 
earnings  or  profit  in  turn  are  the  gross  annual  earnings  less  the 
annual  operating,  supervision  and  repair  cost,  depreciation  com- 
pensation, etc.,  and  less  the  interest  and  taxes  on  plant  (structural) 
value,  going-concern  value  and  worth  of  water  rights.  This  is 
briefly  and  simply  stated  *  in  mathematical  symbols  as  : 


,,,     I  -  0  -  (S  +  (?)  (N  +  R  +  T) 
whence  N  +  R  +  T  ' 

where  P  =  annual  net  profits 

W  =  water-rights  value 
7  =  annual  gross  income 

*  Following  the  form  suggested  by  Robert  E.  Horton,  Consulting  Hydraulic 
Engineer,  Albany,  N.  Y. 


72  PUBLIC  UTILITY  RATES 

0  =  annual  operating  expenses 

S  =  structural  cost 

G  =  going-concern  cost 

N  =  capitalization  rate 

R  =  fair  return  on  investment 

T  =  tax  rate. 

The  warning  that  needs  to  be  made  in  the  use  of  the  earning- 
value  method  is  that  appraisers  have  seemed  apt  to  under-estimate 
the  annual  operating  expenses  and  so  over-estimate  the  profits 
and  the  value  of  water  rights. 

Short-Cut  Steam-Power  Comparison.  —  The  gross  annual 
income  of  a  water-power  plant  in  the  East  is  tremendously 
affected  by  the  cost  of  steam  power.  There  are  few  hydro- 
electric plants  where  a  considerable  proportion  of  the  output 
does  not  compete  with  steam  drive  directly.  Even  where  the 
service  is  for  lighting  the  price  is  limited  to  that  of  possible  local 
steam-plant  current.  Therefore,  there  has  been  used  in  the 
East  a  short-cut  scheme  of  appraising  water  rights  by  capital- 
izing the  difference  in  cost  of  output  between  the  hydraulic 
plant  and  an  equivalent  steam  plant  in  the  same  district.  This 
may  be  permissible  at  times,  but  it  is  not  to  be  universally  rec- 
ommended as  it  substitutes  an  extreme  hypothetical  condition 
where  a  closer  approach  to  actuality  is  possible.  Public  hostility 
to  it  has  already  been  noted.  For  instance,  with  utility  regu- 
lation, even  in  the  East,  the  tendency  of  rates  is  toward  cost  of 
service,  including  therein  a  reasonable  return  on  physical  prop- 
erty employed.  The  regulated  rates  are  not  directly  or  fully  re- 
lated to  the  cost  of  steam  power.  (The  off-peak  factory-drive 
competitive  business,  however,  is  secured  only  by  cutting  under 
steam-power  costs.  The  off-peak  commercial  business  operates 
to  reduce  the  general  cost  of  service  by  giving  more  constant 
utilization  of  the  plant  and  diluting  the  over-head  expenses 
with  small  additional  profits.) 

The  desire  to  use  steam-power  costs  in  the  valuation  of  water 
rights  springs  out  of  the  convenience  of  such  comparisons  rather 
than  rising  from  their  applicability.  The  capitalized  annual 
cost  of  operating  and  maintaining  in  perpetuity  a  profitable 
steam  plant  to  produce  an  amount  of  energy  equal  to  that  which 
can  be  produced  at  a  given  water  power,  generally  will  prove 
larger  than  the  similar  figure  for  a  water-power  development, 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  73 

the  water  rights  of  which  are  determined  by  weighted  comparison 
of  sales,  or  by  study  of  actual  earning-power.  Therefore  the 
value  of  water  rights  determined  by  such  steam-power  cost  com- 
parisons may  be  expected  to  be  often  large  enough  to  prove  an 
embarrassment  to  the  owners  in  time  of  protracted  business 
stagnation,  financial  depression,  strikes,  war,  unfavorable  legis- 
lation, strict  regulation,  or  poor  internal  management.  When 
this  scheme  is  or  has  been  employed,  care  should  be  exercised 
to  see  that  the  valuation  of  water  rights  and  plant  plus  capital- 
ized operation  and  maintenance  costs  does  not  exceed  the  cap- 
italized sum  which  would  maintain  and  operate  the  equivalent 
steam  plant  not  continuously  but  for  such  portion  of  the  time  as 
the  water-power  plant  could  reasonably  be  expected  to  operate  under 
the  unfortunate  contingencies  noted.  The  necessity  for  such  a 
scrutiny  may  be  realized  when  it  is  recalled  that  the  investment 
costs,  which  continue  always,  are  high  for  the  water-power  plant 
and  low  for  the  steam  plant;  the  operating  expenses  which  may 
be  curtailed  during  depressions  are  small  for  the  water-power 
development  and  large  for  the  steam  plant. 

Value  of  Rights  under  Regulation.  —  Many  believe  that  the 
valuation  of  water  rights  in  the  Western  states  must  be  on  a 
different  plane  from  that  in  the  East.  There  is  nothing  seen, 
however,  in  the  sales-comparisons  or  earning-value  plans  of 
appraisal  but  what  can  be  followed  in  one  section  as  well  as  in 
another. 

• 

Some  publicists  claim  that  as  the  water  rights  came  from  the 
public  and  are  used  for  the  public  good,  no  value  should  be 
allowed  the  utility  company  for  those  rights.  The  actual 
conditions  under  which  public  grant  of  water  powers  has  been 
made  need  to  be  considered,  of  course.  It  is  conceivable  that 
in  some  cases  the  public  desired  that  the  company  should  earn 
on  its  investment  and  activity  but  not  on  the  fundamental 
land  and  water  rights.  Where  that  view  actually  prevails, 
obviously  there  can  be  no  water  right  owned  by  the  utility 
company.  Where  such  a  condition  has  not  been  found,  the 
appraiser  has  to  find  rights  even  under  rate  regulation.  This 
is  difficult  for  he  has  to  avoid  a  reasoning-in-circle  situation. 
That  is,  if  he  takes  earnings  through  rates  based  on  a  worth  which 
includes  value  of  water  rights,  the  larger  the  value  of  those  rights 
the  higher  the  rates  must  be;  then  the  larger  becomes  the  value 


74  PUBLIC  UTILITY  RATES 

of  the  rights  again  and  the  higher  the  rates,  and  so  on.  The  only 
escape  usually  is  to  consider  what  the  water  rights  would  be  in 
private  service. 

The  concern  may  have  obligated  itself  to  serve  the  public 
when  it  might  have  continued  to  give  private  service  in  large 
blocks;  then  the  water  rights  ordinarily  should  be  considered  as 
before  the  public  service  became  predominant.  Surely  neither 
the  company  nor  the  public  expected  that  the  company  would 
be  penalized  for  furnishing  a  multitude  of  users  instead  of  the 
few.  The  right  to  use  water  for  private  gain  of  course  is  as 
legitimate  as  the  right  so  to  use  land.  Care  has  to  be  taken 
to  insure  that  the  estimate  of  earnings  on  a  private-business 
basis  is  strictly  consistent,  that  it  does  not  include  income-rate 
enhancement  promoted  by  public  assistance  marking  the  change 
from  private  to  public  utility  —  like  occupancy  of  streets  or  of 
power  of  eminent  domain. 

There  are  various  ways  away  from  reasoning  in  a  circle  when 
the  very  earnings  to  be  taken  in  the  earning-power  method  are 
under  attack  as  unreasonable.  First  it  must  be  ascertained 
what  peculiar  status  any  Federal  and  State  legislation  may  give 
the  water  rights;  or  what  specific  franchise  contracts  may  affect 
them  so  that  they  may  be  declared  non-existent,  existent  but 
partly  dedicated  to  public  benefit,  or  existent  and  entirely  in 
private  possession. 

If  existent  and  in  private  seizure,  in  most  cases,  there  appears 
to  be  no  escape  from  the  higher  prices  due  to  earnings  on  water 
right.  A  parallel  case  exists:  A  state  may  have  given  away  its 
valuable  mineral  land  to  any  who  would  develop  and  it  cannot 
but  endure  the  situation  as  to  old  land  patents,  though  it  can 
demand  a  share  of  the  profits  in  land  yet  ungranted.  It  is  the 
same  way  with  water  rights  in  many  cases.  Legislatures  may 
have  the  power  to  cancel  the  rights  by  amortization  and  repay- 
ment. 

The  actual  estimation  of  probable  earnings  of  the  rights  under 
purely  private  industry  may  be  arrived  at,  in  some  cases  for 
instance,  from  the  figures  available  from  the  private  utilization 
of  part  of  the  water  rights  as  leased  to  others. 

Values  Appurtenant  to  Water  Rights.  — The  "value"  obtained 
in  the  ways  and  under  the  conditions  noted  in  reality  is  more  than 
simply  worth  of  water  rights.  It  has  been  seen  that  it  in- 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  75 

eludes  first  of  all,  the  relatively  unimportant  value  of  the  appur- 
tenant land  for  common  uses.  If  the  plant  is  already  built  and  in 
operation,  the  value  may  often  also  include  a  factor  depending  on 
the  brains  worked  into  the  design,  construction  and  operation. 

The  separation  of  the  value  of  the  real  estate  for  building  or 
agricultural  purposes  may  be  carried  out  with  reasonable  sim- 
plicity, but  the  value  of  applied  mentality  is  very  difficult  to 
separate  from  the  water  rights.  Therefore,  it  is  common  to  allow 
all  of  these  accompanying  values  to  remain  consolidated  with 
the  value  of  water  rights  and  no  case  is  recorded  of  resulting 
injury.  Care  must  be  exercised  not  to  admit  the  same  appli- 
cation of  mentality  in  two  separate  parts  of  the  accounts. 

A  Water-rights  Fallacy.  —  In  actual  cases,  there  are  marked 
differences  in  the  opinions  and  procedure  of  the  different  sides. 
For  instance,  in  condemnation  proceedings  the  owners  frequently 
compute  the  annual  cost  of  their  power  so  as  to  include  the 
interest  and  taxes  on  only  structural  investment  —  purposely 
neglecting  charges  on  water  rights.  They  then  subtract  this 
cost  of  their  water  power  from  the  annual  cost  of  some  sub- 
stituted form  of  power,  like  steam,  and  arrive  at  an  apparent  an- 
nual profit  which  they  capitalize  at  8,  6,  5,  or  4  per  cent.  The 
resultant  figure  is  their  contended  value  of  water  rights.  This 
procedure  is  defended  on  the  claim  that  since  they  own  the  water 
power  they  are  not  paying  interest  on  the  rights,  and  it  should 
not  be  charged  against  them  in  comparing  the  cost  of  water  power 
to  them  with  the  cost  to  them  of  some  substitute  power. 

Obviously  such  a  procedure  is  most  unsound.  If  the  water 
power  were  worth  all  that  is  shown  by  such  a  series  of  computa- 
tions, the  plant  and  rights  could  be  sold  and  the  money  invested 
in  government  bonds  to  bring  by  pure  interest  an  annual  profit 
as  great  as  could  be  secured  after  undergoing  the  risks,  and  giv- 
ing the  attention  needed  to  develop  and  market  the  power. 

On  the  other  side  of  such  condemnation  cases,  the  would-be 
seizors  claim  that  the  value  of  water  rights  cannot  exceed  a  sum 
which  a  purchaser  could  afford  to  pay  if  he  borrowed  all  the 
funds  for  acquisition  of  rights  and  development  of  plant,  and 
if  the  enjoyment  of  the  rights  enabled  him  to  derive  a  small,  safe 
profit  in  return  for  service  in  promotion  and  management,  and 
as  a  guarantee  of  permanent  ability  of  the  works  to  afford 
enough  revenue  to  cover  interest  and  retirance. 


76  PUBLIC  UTILITY  RATES 

The  monetary  value  of  the  water  rights  in  any  specific  case 
for  different  services,  power,  municipal  supply,  irrigation,  may 
not  be  the  same.  There  are  grounds,  in  many  cases,  for  hold- 
ing that  the  true  monetary  value  for  all  services  is  governed  by 
the  maximum  for  any  service,  since  in  private  hands  it  could  be 
put  to  its  most  valuable  use. 

Valuation  of  Storage  Reservoirs.  —  A  problem  now  becoming 
pressing  is  the  valuation  of  storage  reservoir  sites.  In  a  few 
eases,  the  estimated  or  experienced  total  annual  gross  return 
from  the  increase  in  available  power  over  that  of  no  storage  has 
been  capitalized  to  secure  this  value  (with  or  without  deducting 
investment  charges  on  the  reservoir)  on  the  evident  assumption 
that  there  would  be  no  increase  in  size  of  generating  plant  or 
in  the  operating  expenses.  It  is  more  conservative,  but  not 
wholly  satisfying,  to  capitalize  the  net  annual  earnings  from 
the  increase  in  power.  A  still  more  rational  procedure  would 
be  to  compare  the  entire  situations  with  and  without  storage; 
then  the  value  of  the  storage  site  might  be,  as  a  maximum,  the 
capitalized  difference  in  net  earnings  of  the  larger  works  with 
storage  (deducting  all  operating  costs  and  fixed  charges  on  gen- 
erating station  and  storage  works  complete)  and  of  the  smaller 
plant  that  would  have  been  built  if  storage  had  been  impossible. 
In  securing  these  net  earnings  it  hardly  need  be  noted  that 
recognition  must  be  given  to  the  amounts  of  primary,  perma- 
nent, assured  or  continuous  power  and  of  secondary,  non-per- 
manent, assured  or  continuous  power  and  of  secondary,  non- 
permanent,  unassured  or  non-continuous  power  produced  under 
the  two  conditions  of  storage  or  no  storage. 

Where  one  reservoir  benefits  a  string  of  plants  scattered 
downstream,  it  is  common  to  state  that  the  value  of  the  storage 
depends  on  the  amount  of  fall  through  which  the  impounded 
waters  may  be  utilized.  As  a  quantitative  statement  this  may 
be  inaccurate  for  the  general  benefits  of  storage  decrease  with 
the  distance  downstream.  This  is  due  first  to  the  fact  that 
the  impounded  waters  form  a  smaller  and  smaller  proportion 
of  the  stream  flow  as  added  units  of  drainage  area  pour  their 
run-off  into  the  stream.  It  is  due  also  to  the  disturbing  influ- 
ence of  local-plant  pondages  below,  especially  where  they  do 
not  operate  alike  at  simultaneous  hours  or  where  they  are  not 
under  the  control  of  a  single  load-dispatcher.  The  value  of 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  77 

the  reservoir  site  then  is  not  the  sum  of  capitalized  net  earnings 
of  each  plant  assumed  to  secure  full  benefit  of  the  stored  water; 
it  would  depend  upon  the  somewhat  complex  and  difficultly 
ascertained  difference  in  net  earnings  for  the  entire  existing  or 
probable  situation  of  all  the  plants  as  a  unified  system  with  and 
without  the  storage. 

Omissions  in  Inventory.  —  No  matter  how  complete  the  in- 
ventory seems  to  have  been,  nor  how  well  supervised,  it  is  the 
general  experience  of  appraisers  that  later  some  things  were  noted 
which  had  been  overlooked.  It  has  been  found  impossible  to 
insure  complete  freedom  from  all  omissions,  and  to  secure  a  closer 
approach  to  actualities  an  allowance  is  frequently  made  for  them. 
Some  5%  is  not  unwarranted  as  an  average  allowance,  though  2 
or  3%  would  seem  to  suffice  for  a  large  property  of  comparatively 
few  items  and  15%  may  be  fair  at  the  other  extreme  of  a  smaller 
property  with  many  and  scattered  items  which  are  difficult  to 
check  up. 

Allowances  for  Overhead  Charges.  —  Anyone  experienced  in 
construction  knows  that  the  bare  cost  of  fabricating  the  utility's 
present  physical  works  is  not  all  of  the  legitimate  and  necessary 
expense.  There  has  been  money  spent  in  investigating  the  possi- 
bilities of  the  particular  project;  the  promoters  have  earned  some 
reward  in  financing  the  development;  the  cost  of  the  engineers' 
designs  and  of  the  inspection  of  construction  are  not  to  be  neglected; 
various  contingencies  arise  to  add  to  the  cost,  and  evidence  of 
their  presence  does  not  persist.  Working  capital  has  had  to  be 
provided  and  its  interest  has  been  lost.  These  and  similar  costs 
are  all  items  locked -in  with  the  tangible  features  of  the  actual 
plant  brought  into  service.  These  can  be  accurately  determined, 
as  actualities  and  not  as  probable  approximations,  only  if  the 
various  accounts  have  been  well  kept  on  approved  lines  and  pre- 
served intact  —  a  combination  not  common  in  utilities  more  than 
10  to  15  years  old. 

Cost  of  Administration,  Organization  and  Preliminary  In- 
vestigations. —  The  very  first  of  development  costs  covers  the 
expense  of  preliminary  engineering  studies,  of  organizing  the  cor- 
poration, of  acquiring  the  franchises  and  rights  of  way,  of  the 
numerous  legal  actions  which  have  to  be  started. 

It  costs  considerable  to  work  up  an  effective  organization  and 
to  get  out  the  detailed  plans  and  specifications.  After  construe- 


78  PUBLIC  UTILITY  RATES 

tion  is  started,  all  this  corporate  activity  increases.  Items  like 
office  expense,  legal  advice,  damage  claims,  salaries  of  general 
officers,  clerks,  accountants,  etc.,  and  interest  on  the  working 
capital  (which  has  to  be  kept  on  hand  to  pay  contractors,  engineers, 
administrative  force,  purchase  miscellaneous  supplies,  etc.)  grow 
apace. 

The  engineer's  appraisal  must  report  all  evidence  tending  to 
throw  light  on  proper  allowances  for  overhead  items.  The  ap- 
praiser's instructions  should  state  whether  or  not  the  engineer 
is  to  go  farther  and  fix  a  reasonable  figure  for  such  additions;  such 
determination  is  valuation  by  judgment  rather  than  mere  ap- 
praisal by  evidence.  What  has  been  found  fair  in  the  past  is  noted 
in  the  following  few  paragraphs,  on  interest  and  taxes  during  con- 
struction, contingencies,  commissions  and  discounts,  discarded 
property,  promoters'  profit,  etc. 

Interest  During  Construction  Period.  —  A  company,  of  course, 
has  to  pay  interest  on  the  funds  which  it  secures  through  bond 
issues.  Therefore  it  should  be  allowed  to  enter  as  one  of  the 
property-development  expenses  some  proper  interest  on  funds 
locked  up  in  plant  not  yet  earning.  In  the  first  place,  it  is  neces- 
sary to  find  or  estimate  the  sums  secured  from  time  to  time  — 
whether  all  in  a  lump  before  work  was  started  or  in  smaller  amounts 
from  month  to  month  to  pay  cost  of  work  completed  to  those  dates. 

This  analysis  also  involves  study  of  the  time  before  the  plant 
units  become  operative  and  capable  of  earning.  Then  too  the 
rate  which  it  is  reasonable  to  assume  for  such  money  so  tied  up 
must  be  approximated.  It  is  common  recourse  to  allow  6%  but 
it  would  appear  to  be  more  logical  to  take  the  rate  which  the 
loaners  actually  demanded.  If  money  came  from  bonds  then  the 
net  bond  rate  (adjusted  to  sale  price)  might  prevail;  if  the  funds 
came  from  stock  sales  perhaps  nothing  since  the  stock  holders 
may  have  expected  and  received  no  return  until  the  plant  is  capa- 
ble of  operation  and  such  deficits  may  enter  the  business-develop- 
ment cost  —  which  should  not  be  confused  with  overhead  charges 
on  plant.  If  both  bonds  and  stock  were  put  out  then  perhaps  the 
desired  rate  might  be  the  bond  rate  modified  by  the  ratio  of  bonds 
sold  to  total  funds  provided.  Where  temporary  paper  has  to  be 
floated  to  carry  construction  and  later  replaced  by  bond  or  stock 
issues,  of  course,  the  actual  or  estimated  note  rate  is  to  be  consid- 
ered. Some  attempt  at  reduction  of  the  capitalizable  interest 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  79 

may  be  made  also  by  considering  how  the  funds  secured  have 
remained  on  tap  —  if  on  deposit  ready  for  meeting  payments. 
If  so,  then  the  depositary  frequently  allows  2%  daily  balance. 

In  many  cases  perhaps  it  is  sufficiently  exact,  where  definite 
historical  figures  cannot  be  discovered,  to  take  half  of  the  total 
sums  involved  and  the  whole  of  the  construction  period.  But 
in  some  cases  the  heaviest  expenses,  as  for  expensive  machinery, 
come  toward  the  end  of  the  work  and  it  is  advisable  to  approxi- 
mate closer,  say  by  taking  the  probable  figure  of  construction 
cost  for  each  year  and  computing  interest  for  half  a  year  at  full 
rate  or  at  full  rate  less  2%  as  may  be  thought  nearer  actual  pro- 
cedure; then  from  that  year  to  the  end  of  construction  the  esti- 
mated expenditure,  the  full  time  and  the  full  rate  would  be  used. 
Where  extensive  additions  or  reconstructions  to  plant  are  made 
then  each  of  the  various  completed  units  of  equipment  goes  into 
whole  or  partial  service  without  waiting  for  the  others  and  the 
interest  cost  of  construction  is  correspondingly  reduced  to,  say, 
full  rate  for  half  the  time  of  constructing  each  unit.  Interest  may 
increase  construction  cost  from  2  to  10%. 

Taxes  During  Construction  Period.  —  Parallel  to  interest  dur- 
ing construction  are  taxes  on  the  utility  before  operation.  Of 
these,  a  great  variety  are  imposed  on  utility  corporations  —  cor- 
porate, capital-stock,  franchise,  and  real-  and  personal-property. 
The  process  of  finding  the  probable  figure  is  similar  to  determining 
interest;  the  local  demands  must  be  ascertained  and  the  property 
owned  at  each  local  assessment  date.  Taxes  during  construction 
may  amount  to  as  much  as  |  of  1%  of  the  construction  cost. 

Insurance  During  Construction.  —  Closely  allied  with  taxes 
and  interest  is  insurance  during  construction.  There  is,  of  course, 
fire  insurance,  where  fire  loss  is  possible.  Accident-liability  pro- 
tection is  generally  carried  also.  These  items  may  run  as  high  as 
2%  in  certain  difficult  and  hazardous  undertakings  such  as  in  city 
subway  construction  under  streets  in  which  traffic  has  to  be  main- 
tained. Under  ordinary  conditions  \  to  \  of  1%  on  cost  of  work 
is  believed  to  be  a  reasonable  expectation  for  the  total  of  all  in- 
surance premiums. 

Piecemeal  Construction.  —  Where  a  plant  has  really  been  built 
up  by  a  succession  of  additions,  the  cost  is  more  than  as  if  one 
big  job  had  been  done  —  that  is  a  matter  of  common  experience 
and  is  explained  by  the  comparatively  larger  amounts  of  overhead 


80  PUBLIC  UTILITY  RATES 

charges  per  unit  of  plant  on  the  small  than  on  the  large  job,  by 
the  more  favorable  prices  secured  on  the  larger  quantities,  etc. 
When  such  piecemeal  construction  has  to  be  made  around  plant 
in  service  there  is  still  more  added  expense.  There  are  innumer- 
able instances  of  this  in  connection  with  power-plant  changes, 
adding  valves  and  hydrants  to  water  mains,  etc.  But  in  an  ap- 
praisal of  physical  plant  as  standing,  there  is  usually  little  sure 
evidence  of  the  piecemeal  construction  so  that  it  is  essential  to 
consult  whatever  history  of  the  utility  is  available  if  the  concern 
is  to  be  treated  equitably.  Piecemeal  construction  has  often 
added  upward  of  5%  to  construction  cost,  the  addition  increas- 
ing with  the  difficulty  of  the  new  work. 

Contractor's  Profit.  —  It  is  usually  more  economical  for  an 
operating  company  to  employ  a  construction  contractor  who, 
from  special  knowledge  and  experience,  can  usually  build  better 
and  cheaper  than  the  concern  organized  for  operation.  Indeed 
some  operating  concerns,  which  expect  construction  more  or  less 
continuously,  have  organized  a  friendly  construction  company. 
This  scheme  has  been  greatly  abused  at  times  and  made  the  means 
of  bleeding  illegitimate  profits  out  of  a  project.  The  wholly  in- 
dependent contractor's  profit  may  run  from  5  to  20%  of  the  cost 
of  materials  and  work,  but  a  common  allowance  is  10%.  The 
profit  of  an  allied  contractor  ought  not  to  be  more  than  for  an 
independent  one. 

Engineering  Design  and  Inspection.  —  The  charge  of  a  con- 
sulting engineer  who  assumes  complete  responsibility  for  the  design 
and  advises  about  construction  usually  is  5%  but  rises  sometimes 
to  10%  depending  on  the  size  and  intricacy  of  the  work.  The 
fee  would  be  expected  to  decrease  slightly  with  the  magnitude  and 
increase  with  the  difficulty  of  the  work. 

Where  concerns  have  done  their  own  engineering  design  and 
supervision  of  construction,  with  only  the  review  of  prominent 
consulting  specialists,  the  total  cost  has  turned  out  about  the 
same  —  5  to  10%.  For  example  the  reported  figures  for  the 
several  rapid  transit  tunnels  and  subways  in  New  York  City  hover 
around  6%;  for  similar  works  in  Boston,  the  reported  figures  are 
9  to  10%. 

Architect's  Fees.  —  In  some  cases,  where  extensive  buildings 
enter  an  appraisal,  the  above  allowance  for  engineering  charges 
may  need  increasing  to  include  the  architect's  fees  (6%  on  par- 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  81 

ticular  structures).  Sometimes  the  engineer's  fee  may  cover  the 
pay  for  architects,  etc. 

In  most  such  cases  where  many  buildings  enter,  the  grading  of  the 
grounds  has  added  an  appreciable  sum  —  say  from  $100  to  $1000  per 
acre  depending  on  the  fills,  cuts,  gardening  embellishment,  etc. 
This  of  course  is  not  an  overhead  item  of  engineering  and  design 
but  rather  one  of  structural  cost;  it  is,  however,  a  matter  on 
which  oftentimes  no  little  of  the  engineer's  effort  is  expended. 

Influence  of  Contingencies.  —  All  sorts  of  unforeseen  events 
may  have  enhanced  the  cost  of  any  work  more  or  less  over  the 
estimates  for  normal  conditions  —  there  are  floods,  conflagrations 
and  all  the  other  "acts  of  God"  to  be  considered.  After  the  ad- 
verse situations  are  past  and  a  few  years  have  elapsed,  the  marks 
are  not  seen  on  the  physical  property  to  be  appraised.  A  true 
view  can  only  be  secured  by  access  to  good  accounts  and  these 
are  rare  for  the  older  utilities. 

The  history  of  a  locality  or  an  utility  may  well  be  examined  to 
find  evidence  of  particularly  favorable  or  unfavorable  circumstances 
compared  with  those  prevailing  at  the  date  of  appraisal.  But 
usually  it  is  necessary  to  add  a  per  cent  or  two  to  the  pure  physical 
cost  to  cover  what  cannot  be  detailed  item  by  item,  but  which 
experience  teaches  is  always  met  with.  This,  moreover,  covers 
excess  expense  not  compensated  for  as  a  common  business  risk. 
Any  allowance  for  contingencies  is  commonly  lumped  in  with 
engineering. 

Data  on  Engineering  and  Contingencies.  —  Some  very  in- 
structive data  on  actual  costs  of  engineering  and  contingencies 
have  been  collected  by  the  American  -Society  of  Civil  Engineers 
Valuation  Committee  (1914).  Notable  are  the  following  cases: 
the  cost  of  engineering  for  the  Boston  Metropolitan  Water  Works 
was  8.42%  on  $26,736,000,  which  was  the  total  cost  to  1913  — not 
including  engineering;  the  cost  of  engineering  for  the  New 
York  additional  water  supply  (Catskill  Aqueduct)  was  11.2%  on 
$93,128,000  —  the  cost  to  September,  1913,  not  including  engineer- 
ing; on  the  Boston  Tunnel  and  Subway^  the  cost  of  engineering 
was  5.48%  on  $3,623,000,  and  the  general  expense  was  3.58%; 
on  the  East  Boston  Tunnel,  cost  of  engineering  was  6.62%  on 
$2,894,595,  and  general  expense  was  5.57%;  the  Cambridge  Sub- 
way engineering  was  8.05%  of  the  construction  cost  alone 
($1,280,000)  and  general  expense  was  5.20%. 


82  PUBLIC  UTILITY  RATES 

The  cost  of  several  preliminary  engineering  investigations  is 
also  given  by  the  same  authority.  For  the  Louisville  sewerage 
works  this  was  1.7%  on  the  construction  cost  ($3,317,000)  com- 
pared with  10.3%  for  engineering  on  design  and  construction  and 
2.6%  for  administration  and  damage  suits. 

Some  very  general  idea  may  be  gained  in  the  appraisal  as  to 
whether  the  engineering  charges  have  been  heavy  or  light  by  the 
appearance  and  character  of  the  work.  If  the  designs  are  very 
simple  with  comparatively  little  elaborate  detail,  as  in  some 
storage-reservoir  dams,  or  if  the  work  is  somewhat  crude  and  none 
too  well  built,  judged  by  the  standards  of  the  day,  the  engineering 
costs  were  probably  light.  If  the  design  has  necessitated  a  vast 
amount  of  detail,  as  in  some  power  stations  and  filter  plants,  and 
the  work  shows  unusual  excellence,  then  the  charges  were  prob- 
ably above  the  average. 

Bond  Commissions  and  Discounts.  —  Over  and  above  the 
allowances  for  overhead  expense  noted  before  in  connection  with 
various  items  of  physical  property  is  the  cost  of  floating  the  stock 
and  bonds  —  particularly  the  latter.  With  bonds,  this  expense 
is  covered  by  a  commission  demanded  by  the  bond  brokers  as 
profit  and  to  recompense  them  for  the  expense  and  risk  of  sale. 
As  a  result,  the  sum  realized  is  less  than  the  liability  incurred  and 
this  difference  varies  from  5  to  50%.  The  cost  of  the  physical 
property,  overhead  expenses,  etc.,  should  be  increased  by  some 
allowance  for  this.  Commission  control  of  financing  arrangements 
tends  to  reduce  brokerage  costs;  the  California  board  recently 
noted  a  cost  of  less  than  1%  in  one  large  issue  taken  locally. 

Fairly  distinct  from  the  commissions  and  brokerage  expenses 
just  noted  are  bond  discounts  which  have  the  effect  of  increasing 
the  interest  on  capital  actually  paid  in  from  the  sale  of  securities. 
If  a  4|%  bond  with  a  10-year  term  sells  for  96,  then  the  yield 
rises  to  5.1%.  Such  discounts  are  not  generally  recognized  as 
capitalizable,  nor  is  it  sufficient  to  enter  the  price  secured  and  the 
actual  yield  in  fair  value  and  fair  return  —  since  the  concern  has 
incurred  a  liability  for  the  full  par  value  of  the  bonds.  Two 
recent  typical  opinions  bear  well  on  this  point. 

In  the  Blue  Hill  Street  Railway  case  of  the  Massachusetts  Public 
Service  Commission  (No.  886;  P.  U.  R.  1915  E,  370;  July,  1915) 
it  was  stated: 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  83 

While  the  $13,750  representing  discount  on  bonds  likewise  cannot  be 
considered  a  part  of  the  "capital  invested,"  the  company  is  entitled  to 
have  this  sum  liquidated,  or  amortized,  from  earnings  during  the  life  of 
the  bonds,  and  to  receive  interest  upon  it  to  the  extent  that  it  is  insuffi- 
cient to  provide  the  funds  found  by  the  Board  of  Railroad  Commissioners 
to  be  "reasonably  requisite"  for  lawful  purposes.  The  deficiency  was  sup- 
plied through  floating  indebtedness,  and  the  company  is  fairly  entitled 
to  interest  upon  this  indebtedness  until  the  impairment  of  capital  so 
caused  has  been  made  good  from  earnings. 

In  the  New  York  Central  Bond  case  of  the  Illinois  Public 
Utilities  Commission  (No.  3629;  P.  U.  R.  1915  D,  1025;  April, 
1915)  one  reads: 

It  is  further  ordered  that  all  discounts,  commissions,  and  expenses  in 
connection  with  the  approval,  issuance,  and  sale  of  the  said  bonds  author- 
ized to  be  issued  under  this  order  shall  be  amortized  out  of  the  income  of 
the  company  before  May  1,  1935,  by  the  payment  of  equal  annual  in- 
stalments so  long  as  may  be  necessary:  or  that  the  said  company  may 
charge  the  amount  of  such  discounts,  commissions,  and  expenses  to 
profit  and  loss  at  the  tune  of  the  issuance  of  said  bonds,  or  at  any  time 
may  charge  to  profit  and  loss  any  or  all  of  the  unamortized  balance 
thereof. 

Any  premium  realized  through  the  conversion  of  said  debenture  bonds 
into  capital  stock  shall  be  applied  against  any  unamortized  balance  of 
the  discounts,  commissions,  and  expenses  above  referred  to. 

The  Value  of  Discarded  Plant.  —  The  rapid  growth  of  certain 
utilities,  especially  those  involving  the  use  of  electricity,  has  made 
vast  amounts  of  equipment  antiquated  so  that  it  has  been  replaced 
by  apparatus  more  modern,  more  economical  or  more  satisfactory 
to  the  customers.  It  is  necessary,  in  recalling  such  instances, 
only  to  mention  such  things  as  cable  cars,  steam  engines,  common 
arc  lamps,  early  telephones,  etc.  Such  obsolete  property  has  had 
a  useful  life  much  less  than  it  was  reasonable  to  expect  of  it  when 
it  was  placed  in  service  and  therefore  there  has  been  insufficient 
time  to  repay  the  investment  out  of  earnings  even  had  the  need 
for  replacement  expense  been  as  well  recognized  as  it  is  at  this 
later  day. 

If  the  worth  to  be  used  as  a  basis  of  rates  is  itself  based  on  cost 
to  reproduce  the  existing  structure  without  regard  to  the  history 
of  the  utility  concern,  how  may  the  company  be  fairly  treated? 
In  one  way  this  is  another  aspect  of  a  question  already  touched 
upon  —  whether  it  was  better  to  strive  to  secure  a  formal  strict 


84  PUBLIC  UTILITY  RATES 

adherence  to  an  appearance  of  complete  consistency  in  valuing 
property  on  the  basis  of  cost  to  reproduce  new  or  to  secure  a  nearer 
approach  to  fair  dealing  by  throwing  on  this  scheme  "the  light  of 
reason"  in  allowing  the  history  (but  not  a  legendary  past)  of  the 
works  to  modify  the  valuation. 

This  means  that  the  valuation  may  include  cost  of  some  items 
not  still  existing.  Especially  does  this  seem  essential  in  those 
cases  where  the  old  equipment  has  been  thrown  aside  by  legal 
enactment  (in  which  case  the  Knoxville  ruling  probably  does  not 
apply)  and  the  superseding  property  has  been  paid  for  by  fresh 
capital  —  stock,  bonds,  or  notes,  etc.  Similarly,  the  utility 
corporations  may  expect  to  earn  on  something  which  has  passed 
away,  when  there  has  been  insistence  of  the  customers  for  greater 
convenience  or  luxury  while  the  actual  necessities  and  ordinary 
conveniences  of  the  public  were  satisfied  by  the  old  property,  and 
when  there  was  no  prospect  of  a  compensating  economy  by  the 
change.  This  opens  the  door  for  possible  abuse  of  the  historical 
modification  of  reproduction  cost  new,  but  surely  not  in  a  way  that 
is  beyond  the  powers  of  any  live  regulating  commission  properly 
to  curb.  To  prevent  the  perpetuation  of  such  debts  on  a  future 
generation  of  stock  holders  and  rate  payers,  the  present  genera- 
tion of  customers  should  amortise  such  sums  by  contributions 
out  of  the  earnings  —  above  those  for  depreciation,  interest, 
profit,  etc.  Moreover,  the  records  should  clearly  show  when  such 
old  debts  have  been  actually  refunded.  To  many  the  only  logi- 
cal solution  will  appear  to  be  to  allow  the  unrepaid  costs  of  dis- 
carded equipment  to  enter  the  item  of  business-development 
cost. 

There  seems  less  cause  for  including  such  lost  investment  in 
full  in  the  rate-basis  worth,  when  an  unregulated  company  made 
the  change  wholly,  or  in  large  part,  with  the  expectation  of  secur- 
ing important  operating  economies  and  larger  profits.  Before 
the  supplanting  installation  was  made,  the  concern  should  have 
satisfied  itself  that  the  net  economies  of  the  new  apparatus  would 
have  themselves  retired  any  unrepaid  cost  of  the  displaced  equip- 
ment within  a  reasonable  term  —  say  the  length  of  time  before 
the  older  became  insufficient,  —  and  paid  interest  on  the  new 
investment  and  on  the  diminishing  balance  of  the  old. 

There  may  be  cases,  where  the  repayment  process  is  not  com- 
plete and  where  full  economies  are  not  realized,  that  the  "fair 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  85 

value"  would  include  the  new  investment  and  some  part  of  the 
old.  The  annual  expenses  might  also  include  something  to 
hasten  the  amortization  of  the  old  funded  debt  which  it  was  de- 
sired to  have  continually  diminish.  Such  rather  generous  treat- 
ment, under  fair  commission  regulation,  seems  to  give  a  more 
logical  solution  of  the  obsolete-property  question  than  the  blind 
provision  of  allowing  a  slight  addition  to  the  rate  called  "fair 
return"  to  compensate  for  another  "risk  of  the  business." 

Promoters  Profit.  —  Compensation  for  promoters'  services  is 
another  overhead  expense  not  listed  by  any  inventory  of  physi- 
cal property.  It  has  been  allowed  in  some  cases  and  undoubtedly 
could  have  been  allowed  with  justice  in  many  others.  Probably 
this  item  would  have  been  more  easily  accepted  had  the  attitude 
and  operations  of  some  conspicuous  promoters  been  more  calcu- 
lated to  win  public  confidence. 

Many  promoters,  perhaps  a  majority,  are  men  of  large  out- 
look and  force  enough  to  push  through  a  project  where  the  nar- 
rower minded  or  timid  would  fail.  Ability  to  win  support,  and 
to  build  in  face  of  great  obstacles,  or  at  notably  low  cost,  deserves 
a  good  reward,  of  course. 

In  the  past  it  has  been  a  common  custom  for  promoters  to  take 
their  pay  for  the  time  they  have  nursed  a  project,  for  hardships, 
etc.,  in  speculative  issues  of  stock  rather  than  in  admitted  sums, 
say  of  5  to  10%  or  more  of  the  cost.  Up  to  a  certain  point  this 
stock  is  "brains,"  not  "water."  Unscrutinized  and  speculative 
rewards  in  connection  with  public  utilities  are  not  highly  regarded 
now,  but  condemnation  of  such  issues  quietly  made  in  the  past 
are  not  to  be  over-severely  condemned  in  all  cases  today  on  ac- 
count of  the  once  general  public  acquiescence.  Yet  such  a  state- 
ment is  not  to  be  construed  as  a  sweeping  approval  of  promoters' 
watered  stocks,  some  of  which  seemingly  have  been  put  out  with 
evil  intent. 

Business-development  Investment;  "  Going-concern  Value." 
—  It  is  obvious  that  for  a  case  of  purchase  of  an  utility,  a  smooth- 
running  concern  in  an  established  locality  or  a  developed  territory 
is  worth  more  than  a  new  development  of  equal  capacity.  This 
has  been  recognized  by  courts  and  regulating  commissions  gen- 
erally; for  instance,  an  early  important  decision  is  that  of  the 
U.  S.  Supreme  Court  in  the  Kansas  City  Water  Works  case 
(62  U.  S.  Fed.  Rep.  853)  where  we  read: 


86  PUBLIC  UTILITY  RATES 

The  city  steps  into  possession  of  a  property  which  not  only  has  the 
ability  to  earn  but  is  in  fact  earning.  It  should  pay  not  merely  the  value 
of  a  system  which  might  be  made  to  earn  but  that  of  a  system  which 
does  earn.  , 

The  fact  that  this  earning  condition  represents  money  invested 
and  skill  applied  makes  permissible  some  allowance  for  it  in  the 
basis  of  rates,  among  the  intangible  values.  Great  care  should  be 
exercised,  however,  not  to  include  in  the  rate-basis  worth  those 
elements  which  would  enter  a  purchase  price  as  springing  out 
of  adequate  rates  and  good  service,  and  which  exist  because 
maintained  by  annual  expenditures. 

The  term  "going  value"  has  been  used  for  years  to  cover  a  list  of 
vague  and  diversified  ideas  as  to  certain  additions  to  the  total 
worth  of  physical  property  used  as  basis  of  rates.  Some  of  the 
claims  seemed  to  include  vague  unearned  increments  in  market 
value  and  were  so  problematical  and  difficult  of  consistent  appli- 
cation that  "going-value"  at  one  time  bid  fair  to  be  only  a  name 
for  a  discredited  effort  to  increase  value.  But  if  we  give  it  the 
very  definite  idea  of  the  unrepaid  extra  investment  surely  or  prob- 
ably made,  after  operation  has  started,  in  bringing  the  utility  up 
to  the  reasonable  earning  power  which  is  associated  with  success- 
ful service,  then  it  will  be  more  generally  accepted  in  rate  cases. 

Accrued  Deficits  as  a  Measure  of  Going  Value.  —  In  the 
early  years  of  an  enterprise,  it  is  necessary  to  make  the  prices  for 
service  attractive  in  order  to  build  up  the  business.  But  the 
actual  costs,  if  distributed  on  the  few  early  customers,  would  make 
the  charges  usually  all  out  of  proportion  to  the  intrinsic  value  of 
service  as  fixed  by  potential  competition  with  other  service  or 
product.  Then  there  results  a  series  of  annual  deficits,  between 
earnings  as  they  are  and  as  they  might  better  be,  which  in  jus- 
tice to  the  stockholders  must  be  made  up  somehow  and  sometime. 
If  we  limit  "going  value,"  for  rate  making,  to  the  cost  of  the 
aggregate  deficiencies  in  the  rates  of  the  utility,  then  a  simple 
and  practical  solution  of  a  troublesome  problem  has  been  made  — 
though  this  plan  is  not  universally  accepted  by  any  means. 

This  practice  eliminates  the  factor  of  "good-will."  Utilities 
have  become  largely  monopolistic  in  nature  and  "good-will"  is 
generally  discarded  as  an  asset  to  be  included  in  the  basis  of  rates, 
it  being  argued  that  the  public  has  to  buy  from  the  one  concern 
or  suffer  the  inconvenience  of  no  service.  No  considerable  in- 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  87 

vestment  is  represented  in  devices  to  meet  competition.  There 
are,  to  be  sure,  certain  minor  expenses,  in  the  case  of  a  monopoly 
with  enlightened  management,  for  publicity,  new  business,  en- 
couraging the  confidence  and  respect  of  customers,  but  these  are 
in  the  nature  of  general  annual  administrative  costs  —  certainly 
if  such  efforts  are  cut  off  the  old  attitude  of  suspicion  and  un- 
friendliness returns  in  a  few  months.  Satisfied  customers  spend 
more  than  disaffected  ones,  and  favorable  public  sentiment  makes 
it  easier  to  tide  over  operating  emergencies;  this  is  like  more  or 
better  oil  for  the  machinery.  There  is  then  no  good  reason  why 
the  customers  should  pay  for  this  item  year  after  year  through 
general  expenses  and  then  pay  interest  on  it  as  a  capitalized  value. 

Some  will  argue  that  during  early  years  there  is  expense  in 
fitting  the  new  organization  together,  in  harmonizing  all  the  little 
details  of  equipment,  in  adjusting  apparatus.  It  is  true  that  these 
are  more  than  mere  evanescent  effects  of  administrative  expendi- 
ture for  their  good  result  persists  and  is  transferable.  How  much 
money  is  so  spent  is  very  speculative  and  indeed  it  is  probably 
distributed  in  various  accounts  as  general  expense,  repairs,  oper- 
ation, etc.  Then  this  also  has  been  paid  by  the  customers  and  so 
a  separate  increment  in  worth  should  not  be  capitalized  directly. 

There  is,  however,  logic  in  the  argument  that  if  expenditures 
for  publicity,  new  business,  internal  adjustment,  etc.,  had  not 
been  made  (neglecting  the  consequent  drop  in  business  secured) 
there  might  not  have  been  as  large  early  deficits.  If  the  utility 
concern  is  allowed  to  include  in  its  capitalization  the  early  defi- 
ciencies below  a  fair  return,  then  there  will  be  adequate  compen- 
sation for  expense  of  knitting  the  organization  together  —  unless 
rare  and  peculiar  circumstances  can  be  proved.  It  seems  fair  if 
these  early  deficiencies  in  interest  and  profits  are  summed  up, 
only  temporarily  capitalized,  and  the  total  gradually  repaid  out 
of  earnings;  this  has  the  added  advantage  (in  cases  where  the 
cost  of  service  approaches  the  ultimate  "value"  as  fixed  by  po- 
tential competition  of  a  rival  process)  of  strengthening  an  utility's 
commercial  position  by  not  asking  the  customers  forever  to  pay 
interest  on  inevitable  early  mistakes  as  well  as  on  full  cost  of 
final  plant. 

Wisconsin  Method  of  Estimating  Going  Value.  —  What  has 
come  to  be  known  as  the  "Wisconsin  method"  of  estimating  going- 
concern  value  or  business-development  investment,  consists  in 


88  PUBLIC  UTILITY  RATES 

adding  to  each  year's  investment  the  deficiency  by  which  net 
earnings  fail  to  provide  for  depreciation,  interest  and  profits,  etc. 
The  plan  was  worked  out  in  the  case  of  Hill  v.  Antigo  Water  Co. 
(3  Wis.  R.R.  Com.  Rep.  623),  and  further  explained  in  the  case 
of  State  Journal  Printing  Co.  v.  Madison  Gas  Electric  Co.  (4  Wis. 
R.R.  Com.  Rep.  580).  A  few  paragraphs  from  this  last  report 
state  the  method  so  concisely  that  they  are  reprinted : 

The  plant  was  charged  with  the  cost  of  the  plant  at  the  beginning  of 
the  first  year,  with  the  new  extensions,  interest  on  the  investment,  de- 
preciation of  the  plant  and  the  expenses  of  operation  during  the  first 
year.  It  was  next  credited  with  the  total  gross  earnings  during  the  year. 
The  balance  between  these  debits  and  credits  was  regarded  as  the  net 
value  of  the  plant  at  the  end  of  the  year.  This  balance  was  then  carried 
forward  to  the  beginning  of  the  second  year,  and  with  the  extensions, 
interest,  depreciation  and  operating  expenses  for  this  year  charged  up 
against  the  plant  in  the  same  manner  as  for  the  first  year.  The  credits 
to  the  plant  for  the  second  year,  the  same  as  for  the  first,  consisted  of 
the  gross  earnings;  and  the  balance  was  regarded  as  the  net  value  of  the 
plant  at  the  end  of  the  second  year.  These  operations  were  performed 
for  each  year  of  the  fife  of  the  plant,  the  balance  at  the  end  of  the  last 
regarded  as  the  value  of  the  plant  on  the  earnings  basis  in  question  at 
the  end  of  the  period.  Computations  of  this  character  must  of  necessity 
show  the  value  of  a  plant  at  the  end  of  each  j^ear  on  any  given  earning 
basis.  If  the  figures  that  are  included  in  these  calculations  contain  only 
such  items  as  equitably  belong  therein,  and  if  the  rate  of  interest  and 
profit  that  is  used  is  the  rate  that  is  fair  and  equitable  to  all  concerned, 
then  it  also  follows  that  the  balances  at  the  end  of  the  year  are  fairly 
close  representations  of  the  reasonable  valuation  of  the  plant  and  its 
business. 

Thus  it  is  seen  that  early  deficits  in  net  earnings  below  stipu- 
lated rates  of  return  increased  the  cost  of  the  plants  and  business 
by  that  amount;  early  surpluses  above  such  stipulated  return 
repaid  the  cost  of  plant  and  business.  The  Wisconsin  Commis- 
sion, at  that  time  (1910),  held  that  when  the  worth  of  physical 
property  (by  appraisal)  was  less  than  the  total  investment  as 
above  determined,  the  concern  was  entitled  to  have  at  least  the 
difference  entered  into  the  rate-basis  valuation.  If  the  probable 
investment  figure  was  equal  to  or  less  than  the  appraised  value  of 
physical  plant,  then  no  allowance  for  going-concern  value  or 
business-development  expense  was  admitted.  The  same  Wis- 
consin report  above  quoted  has  this  further  to  add  about  the  plan : 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  89 

For  public  utilities  which,  under  both  the  common  and  the  statute 
law,  under  normal  conditions,  are  only  entitled  to  reasonable  returns  on 
the  investment,  justice  as  well  as  equity  appears  to  demand  that  the 
amounts,  if  any,  by  which  they,  under  ordinary  conditions,  have  failed 
to  earn  such  returns,  should  be  considered  in  fixing  values  and  rates  for 
such  plants.  In  fact,  such  consideration  would  in  most  cases  seem  to  be 
absolutely  necessary  in  order  to  secure  the  capital  required.  For  it 
must  be  obvious  to  all,  that  unless  the  prospects  for  obtaining  at  least  a 
reasonable  amount  for  interest  and  profit  are  at  least  fairly  good,  private 
capital  will  not  enter  such  enterprises.  By  this  is  not  meant,  however, 
that  deficits  from  operation  can  be  equitably  taken  into  account  in  the 
appraisals  or  rates  regardless  of  the  conditions  under  which  they  were 
incurred.  As  already  stated,  when  such  deficits  are  due  to  abnormal 
conditions,  or  when  due  to  bad  management,  defective  judgment,  ex- 
travagance, lack  of  ordinary  care  and  foresight,  unduly  high  capital 
charges  and  other  causes  of  this  nature,  it  is  manifestly  clear  that  they 
should  be  accorded  little  or  no  consideration  in  either  the  valuation  or 
the  rates.  This  is  also  likely  to  be  the  case  for  such  deficits  which  were 
incurred  under  and  borne  by  others  than  the  present  owners,  and  which 
have  been  wiped  out  in  the  various  transfers  of  ownership.  That  these 
propositions  are,  as  a  rule,  sound  and  equitable,  appears  to  be  so  clear  as 
to  need  no  further  argument. 

This  plan  has  been  repeatedly  affirmed.*  It  seems  to  be  ap- 
proved in  theory  at  least  by  one  old  federal-court  decision  — 
Metropolitan  Trust  Co.  v.  Houston  &  T.  C.  Ry.  Co.,  1898  (90  Fed. 
Rep.  683).  The  plan  has  been  disapproved  in  a  few  rate  cases  — 
notably  Spring  Valley  Water  Co.  v.  San  Francisco,  1908  (165  Fed. 
Rep.  667),  evidently  (1)  in  fear  that  the  deficits  might  be  due  to 
waste,  extravagance,  and  mismanagement  and  (2)  because  a  con- 
cern earning  well  from  the  start  would  have  no  "going  value." 
It  is  true  that  the  method  fails  to  show  a  "going  value"  in  initially 
prosperous  concerns  —  a  value  actually  acquired  but  nevertheless 
one  possibly  to  be  regarded  as  amortized  by  the  consumers  through 
high  rates.  No  concern  jumps  into  a  full-fledged  business  and 
the  presumption  is  safe  that  there  will  be  early  deficits  or  else 
comparatively  high  rates.  It  should  be  noted  that  the  denial  of 

*  In  the  following  rate  cases:  Racine  v.  Racine  Gas  Light  Co.,  1911  (6 
Wis.  R.R.  Com.  Rep.,  228);  Beloit  v.  Beloit  Water,  Gas  &  Electric  Co.,  1911 
(7  Wis.  R.R.  Com.  Rep.,  187);  in  re  Oconto  City  Water  Supply  Co.,  1911 
(7  Wis.  R.R.  Com.  Rep.,  497);  JanesvOle  v.  Janesville  Water  Co.,  1911 
(7  Wis.  R.R.  Com.  Rep.,  628);  Marinette  v.  City  Water  Co.,  1911  (8  Wis. 
R.R.  Com.  Rep.,  334). 


90  PUBLIC  UTILITY  RATES 

going-concern  value  to  a  prosperous  utility  is  possibly  a  retroac- 
tive penalizing  for  past  profits  —  a  procedure  apt  to  be  challenged 
in  any  high  court. 

Reproduction  of  Going-concern  Value.  —  The  Wisconsin 
method  of  finding  going  value  depends  on  securing  records  of  origi- 
nal investment,  extensions,  earnings,  etc.,  and  it  fails  when  the 
basic  data  are  not  available.  Some  other  approach  to  the  same 
end  then  is  desirable.  An  attractive  but  laborious  method  of 
reproducing  the  going-concern  value  has  been  evolved  by  J.  W. 
Alvord  and  Leonard  Metcalf  (American  Water  Works  Association, 
June,  1909;  Transactions  American  Society  of  Civil  Engineers, 
Vol.  LXXIII).  This  method  probably  appeals  strongly  to  the 
advocates  of  a  strict  consistency  in  use  of  reproduction  cost  of 
property  (unaffected  by  historical  conditions). 

Alvord  and  Metcalf  take  development  cost  as  the  sum  of  the 
present  worths  of  the  annual  excesses  in  net  return  available  for 
fixed  charges  and  dividends  (excess  divided  by  the  amount  of  $1 
at  interest  to  the  end  of  the  given  time)  from  the  existing  plant 
over  the  net  earnings  of  an  imaginary  comparative  plant  (con- 
struction just  started)  from  the  date  of  valuation  to  the  time  when 
the  net  earnings  of  the  new  plant  equal  those  of  the  old.  The 
comparative  plant,  which  of  course  is  purely  hypothetical,  is 
pushed  ahead  as  rapidly  as  possible,  taking  up  the  business  of  the 
old  as  fast  as  suitable  units  can  go  into  service. 

Obviously  many  estimates  have  to  be  made  such  as  (1)  time 
required  for  construction  of  the  comparative  plant,  (2)  time  re- 
quired for  its  net  earnings  to  equal  those  of  the  old  plant,  (3)  ratio 
of  installed  capacity  to  actual  business  for  the  new  plant  compared 
with  the  old,  (4)  the  gross  income  of  the  new  plant  at  various 
stages  of  the  transfer  of  business,  (5)  the  various  expenses  except 
return  available  for  interest  and  dividends. 

It  is  evident  also  that  many  of  the  assumptions  must  be  more 
or  less  arbitrary.  There  is  also  the  anomalous  situation  that  com- 
plete value  of  the  new  plant  has  to  be  in  hand  to  start  with,  in- 
cluding the  very  going-value  sought.  However,  a  tentative  value 
is  given  from  experience  and  the  calculations  are  carried  through. 
Then,  if  the  actual  resultant  going-concern  value  is  much  different 
from  the  assumed,  the  tentative  value  is  changed  and  the  process 
repeated  until  there  is  no  change  needed. 

This  scheme  of  finding  going-concern  value  has  been  applied 


APPRAISAL  OF  LAND  AND  WATER  RIGHTS  91 

to  condemnation  and  transfer  proceedings  rather  than  to  rates, 
though  there  is  no  good  reason  why  it  is  not  so  applicable.  Some 
will  accept  it  as  they  accept  reproduction  cost  based  on  present 
physical  conditions  —  in  lieu  of  original  cost  and  investment  or 
knowledge  of  old  conditions;  others  seeking  rigid  consistency  of 
reproduction  methods  of  evaluation  will  accept  it  in  place  of  the 
Wisconsin  accrued-deficit  method.  It  has  been  assailed  by  the 
opponents  of  the  reproduction-cost  schemes  of  appraisal  for  what 
they  call  its  "unreal  and  fantastic  assumptions"  —  such  as  start- 
ing a  hypothetical  new  plant  in  a  community  and  taking  over  as 
fast  as  possible  the  business  of  the  existing  plant.  Those  who 
assail  it  most  have  no  more  logical  substitute  and  retire  to  a  gen- 
eral denial  of  value  from  business-development  expense. 

Depreciation  as  a  Measure  of  Going  Value.  —  It  has  fre- 
quently transpired  that  an  utility  company,  instead  of  making 
wise  provision  against  depreciation  (usually  not  realizing  the 
'necessity  of  giving  this  item  careful  consideration),  has  continued 
to  pay  dividends  more  or  less  satisfactory  to  the  stockholders.  In 
some  quarters  there  is  a  disposition  to  hold  that  the  depreciation 
in  value  of  the  plant  is  then  a  direct  measure  of  the  cost  of  develop- 
ing a  going  concern. 

There  is  merit  in  this  attitude  if  the  management  has  been  hon- 
est though  short-sighted  and  if  the  dividends  from  the  start  have 
been  only  reasonable  —  no  more  or  no  less.  Then  the  moneys 
diverted  from  depreciation  funds  can  have  gone  only  into  develop- 
ment of  business.  The  trouble  with  this  measure  of  going  value 
is  that  seldom  is  the  proper  combination  seen  of  honest  manage- 
ment, lack  of  depreciation  provisions,  and  reasonable  return. 
Such  a  measure  of  going  value  may  be  expected  to  be  unfair  to 
the  utility,  rather  than  to  the  public,  since  it  is  a  common  result 
that  in  the  early  years  the  concern  is  not  able  to  set  aside  from 
earnings,  either  ample  depreciation  funds  or  reasonable  return. 

Amortization  of  Intangible  Values.  —  While  all  the  plant- 
development  items,  discounts,  promoter's  profits,  engineering  and 
contingent  allowances,  taxes,  business-development  costs,  etc., 
are  to  be  seriously  considered  and  usually  aggregated  in  fair 
value,  yet  they  are  expenses  which  the  present  generation  of  users 
should  be  expected  to  wipe  away  so  far  as  it  is  possible.  We  may 
rightfully  pass  along  to  our  successors  total  liabilities  equal  only 
to  the  tangible  assets  and  leave  their  hands  free  to  work  out  their 


92  PUBLIC  UTILITY  RATES 

utility  problems  under  their  own  strange  conditions.  They  should 
not  start  with  the  burden  of  our  development  expenses  which, 
if  history  repeats,  will  not  prevent  development  expenses  of  the 
future  plants. 

The  common  way  to  attain  this  end  is  to  lay  aside  out  of  earn- 
ings, some  contributions  to  an  amortization  fund  for  retiring  bonds, 
etc.  It  is  equivalent  to  this  to  make  extensions  to  equipment 
out  of  earnings  or  surplus  until  the  worth  of  tangible  property 
is  up  to  the  capitalization  and  bonds.  In  the  early  years,  before 
the  business  has  attained  any  dividend-yielding  status,  either 
course  may  not  be  possible  but  the  need  for  such  action  is  not  to 
be  permanently  forgotten  and  the  process  should  be  instituted 
as  soon  as  a  way  can  be  found.  There  is  no  occasion  for  amortiz- 
ing an  overhead  burden  which  will  be  wiped  out  by  the  funds 
provided  against  depreciation  of  the  underlying  property  item. 

While  as  a  general  proposition  it  seems  fair  to  group  the  develop- 
ment expenses  noted  as  parts  of  rate-basis  worth,  yet  it  is  not  to  be 
forgotten  that  such  a  practice  in  rare  cases  may  make  the  cost  of 
service  prohibitive  or  unattractive  in  some  specific  cases  and  thus 
hamper  a  concern's  development.  Therefore,  cases  may  arise 
when  these  sums  in  part  are  to  be  noted  as  an  unearning  invest- 
ment to  be  retired  as  described,  and  as  early  as  possible. 

Effect  of  Good  Design  or  Favorable  Location.  —  After  a  "  fair- 
value"  has  been  established  so  far  in  accordance  with  the  ideas 
already  set  forth,  then  if  the  plant  in  question  does  not  stand 
free  from  comparison  with  any  similar  plant,  a  final  disturbing 
question  arises  as  to  the  full  propriety  of  making  this  somewhat 
idealized  value  the  actual  rate-basis  worth.  Nearly  every  en- 
gineer knows  of  some  utility  plants  of  -such  meritorious  design 
and  favorable  location  that  they  can  give  good  service  at  less  than 
average  cost;  other  plants  have  such  inferior  design  and  poor 
location  that  they  can  furnish  only  inferior  service  and  that  at 
higher  prices.  Shall  the  same  percentage  rate  of  earnings  in 
both  cases  be  allowed  on  the  aforesaid  "fair  value"  similarly 
obtained  f6r  each  —  supposing  that  capital  is  attracted  by  the 
same  rate  in  both  localities?  If  so,  then  the  inferior  service  must 
cost  the  customers  more  than  the  superior. 

There  is  some  ground  for  arguing  that  the  better  situated  com- 
pany should  be  given  still  another  increment  of  "fair  value"  so 
that  the  rate-basis  worth  may  include  some  of  the  capitalized 


93 

brains  that  may  have  been  responsible  for  the  favored  condition. 
But  obviously,  if  inherent  natural  conditions  contribute  to  the 
superior  service  and  low  cost  then  the  public  should  reap  a  pro- 
portionate benefit,  for  it  has  been  settled  that  an  utility  is  en- 
titled to  a  fan*  return  on  fair  value  and  no  more  —  which  surely 
does  not  include  a  return  on  capitalized  opportunity.  How  then 
can  this  be  adjusted?  The  question  has  not  been  decided  by  any 
court  or  commission  and  so  may  be  regarded  as  in  the  formative 
stage.  Tentative  schemes,  however,  may  here  be  advanced  for 
future  test  of  propriety. 

If  the  utility  works  are  really  able  to  furnish  the  superior  service 
at  low  rates,  and  there  are  absolutely  no  natural  endowments 
which  create  or  foster  this  situation,  then  it  may  be  accepted, 
prima  fade,  that  unusual  promotion  ability  must  have  been  mani- 
fest and  may  be  rewarded  —  if  any  principles  akin  to  "statutes  of 
limitation"  do  not  prevent.  The  amount  by  which  the  "ap- 
praised-value "  may  be  increased  for  the  rate-basis  worth,  is  then 
such  a  sum  as  would  make  the  resultant  rates  approach  more  or 
less  to  the  average  of  many  similar  localities  —  or  to  the  average, 
perhaps  of  a  selected  number  showing  comparatively  low  rates. 
This  has  the  effect  of  increasing  the  rate  of  return.  Indeed  the 
rate  of  return  may  in  the  end  be  the  real  criterion.  A  good  com- 
mission ought  to  be  able  to  estimate  the  cost  of  having  the  work 
planned  by  one  of  the  leaders  of  the  industry,  then  adding  this  to 
fair  value.  A  dividing  scale  also  might  be  devised  for  the  allowable 
increase  of  worth  corresponding  to  a  given  decrease  in  rates. 

If  on  the  other  hand,  natural  opportunities  create  or  foster  the 
favorable  rates  and  service,  then  there  can  logically  be  little  or  no 
increase  in  capitalization  and  all  the  benefit  may  go  to  the  cus- 
tomers. If  the  peculiar  favorability  is  due  say  half  to  the  pro- 
moters and  half  to  nature,  then  the  utility  corporation  may  secure 
half  the  value  increase  it  would  have  secured  if  the  promoter 
alone  has  made  the  gain  possible;  and  so  on. 

It  may  be  desired  to  secure  this  end  sometimes  by  changing 
the  rate  instead  of  the  rate-basis  value.  Then,  the  high  rate  is 
always  before  the  public  where  the  explanation  of  its  size  must 
be  repeated  at  times.  Changes  in  capital-value  are  not  so  easily 
compared  "in  the  street"  as  are  rates  of  return  and  are  not  so 
frequently  published.  There  would  perhaps  be  aroused  less  mis- 
conception and  misunderstanding  by  providing  for  the  extra  re- 


94  PUBLIC  UTILITY  RATES 

ward  in  rate-basis  worth  instead  of  per  cent  return ;  if  commission 
regulation  is  complete  and  in  good  hands  the  chance  of  abusing 
the  lack  of  easy  publicity  is  small. 

If  the  foregoing  reward  be  permitted,  then  it  seems  necessary, 
in  the  absence  of  natural  obstacles  causing  inferior  service  and 
higher  costs,  to  penalize  poor  design  and  construction  or  lack  of 
promotion  brains.  If  the  added  cost  and  inferior  service  are 
wholly  due  to  short-sightedness,  then  the  intangible  values  al- 
ready noted  may  be  properly  reduced  until  the  rates  approach 
those  elsewhere  for  the  same  service.  How  far  this  should  go 
depends  on  the  grossness  of  mismanagement,  extravagance  of 
expenditures,  etc.;  as  to  the  presence  or  absence  of  extreme  neg- 
ligence and  gross  carelessness,  commissions  may  judge.  If  natural 
conditions  impair  service  and  lead  to  the  high  costs  then  the  public 
should  bear  the  burden  and  the  concern  little  or  none.  Inter- 
mediate degrees  of  shared  responsibility  may  allow  proportionate 
reduction  of  intangible  parts  of  capitalized  values.  The  various 
schemes  possible  for  estimating  increase  of  intangible  values  to 
cover  unusually  beneficial  promotion  can  be  reversed  for  comput- 
ing a  decrease. 

Sudden  Reduction  of  Value.  —  The  few  paragraphs  immedi- 
ately foregoing  lead  to  a  possible  solution  incidentally  of  another 
problem  which  has  bothered  many.  Suppose  the  favored  utilities 
to  have  been  established  for  a  decade  or  two  and  always  to  have 
charged  rates  comparing  favorably  with  those  in  other  localities 
but  bringing  an  unusually  good  net  return  to  the  company. 
The  securities  then  have  appreciated  on  the  general  expectation 
that  the  high  returns  will  continue.  Shall  a  new  commission  with 
large  powers  break  in,  reduce  rates  to  the  idealized  ''fair-value- 
fair-return"  plane,  cause  a  decrease  in  market  value  of  securities 
and  a  corresponding  financial  loss  to  recent  investors?  Certainly 
if  the  favored  earning  condition  of  the  utility  is  purely  the  result 
of  promotion  brains,  such  a  change  would  not  seem  equitable, 
on  the  grounds  previously  noted.  If  natural  conditions  produce 
the  favored  situation,  wholly  or  in  part,  then  in  many  cases  it  may 
be  possible,  without  great  hardship  on  any  one,  to  reduce  gradually 
the  price  per  unit  output  and  the  actual  return  on  appraised  value, 
the  time  involved  depending  somewhat  on  how  widespread  the 
distribution  of  securities  has  been  from  the  original  holders.  The 
aim  might  well  be  to  let  a  security  holder  recover  in  his  super- 


APPRAISAL  OF  LAND  AND   WATER  RIGHTS  95 

profits  (above  a  very  moderate  return  on  his  investment)  the  final 
loss  of  principal  to  be  expected. 

Such  a  situation  also  somewhat  resembles  the  gas-utility  situa- 
tion in  England,  public  control  of  which  was  secured  with  diffi- 
culty. The  final  outcome  was  that  a  lower  return  was  earned  by 
new  capital,  through  limiting  dividends  or  selling  shares  at  auc- 
tion, and  increases  of  dividends  depended  on  reductions  of  rates 
for  service.  Excess  earnings  went  into  a  reserve  fund  (10%  of 
capital)  for  contingencies,  extraordinary  renewals;  or  indicated 
further  reductions  of  rates. 


CHAPTER  VII 

REASONABLE    RETURN;    INTEREST;    COMPENSATION 
FOR  RISK  AND   ATTENTION;    EXTRA  PROFITS 

What  is  a  Reasonable  Return?  —  The  rate  of  return  which 
should  be  secured  on  the  money  invested  in  a  public-utility  plant 
has  been  commonly  denned  in  a  general  way  as  that  which  is 
sufficient  to  pay  ordinary  interest  and  above  this  to  compensate 
for  the  risks  of  the  business.  It  has  also  been  generally  defined, 
from  another  angle,  as  one  just  sufficient  to  attract  fresh  capital 
to  the  field.  But  for  the  very  specific  problems  of  ascertaining 
fair  rates,  very  definite  percentages  as  to  the  allowable  of  return 
are  required,  and  these  are  not  indicated  by  such  broad  statements 
which  are  declarations  of  ends  rather  than  descriptions  of  means. 
But  by  scientific  approach  one  can  analyze  the  judgment  of  suc- 
cessful men  and  fix  upon  quite  definite  percentages. 

It  is  obvious  that  capital  will  flow  into  a  field,  if  it  secures 
(1)  ordinary  local  interest  return,  plus  (2)  compensation  for 
business  risks,  plus  (3)  some  reward  for  the  actual  attention  re- 
quired from  the  investor,  and  plus  (4)  the  possibility  of  more  or 
less  profit  above  these  other  factors  which  partake  much  of  the 
nature  of  mere  wages  of  capital  and  capitalists.  It  should  be 
illuminating  therefore  to  examine  these  elements  in  theory  and 
practice,  to  formulate  a  basis  of  judgment  as  to  the  rate  of  return 
in  specific  cases.  Only  what  may  be  called  normal  conditions 
will  be  considered  —  where  the  utility  can  sell  its  product  or 
service,  with  profit,  at  rates  which  are  equal  or  less  than  those 
which  customers  will  pay  rather  than  forego  the  service.  Situ- 
ations where  such  is  not  the  case  require  such  special  measures 
that  their  discussion  cannot  easily  be  undertaken  in  advance  of 
occurrence. 

Pure  Interest.  —  Money  cannot  be  secured  for  any  business 
purpose  unless  a  certain  annual  percentage  be  paid  for  the  use  of 
it.  In  most  cases,  individual  borrowers  can  exert  little  or  no  in- 
fluence widely  to  reduce  the  rates  of  interest,  though  it  is  largely 
affected  by  the  desires  of  borrowers  as  a  body.  Similarly,  an  in- 

96 


REASONABLE  RETURN  97 

dividual  lender  can  seldom  exert  influence  to  raise  the  general 
rate  though  the  total  available  funds  and  the  aggregate  demands 
of  the  lenders  may  do  it. 

It  is  commonly  reported  at  times  that  4%,  5%  or  6%,  say,  is 
the  prevailing  interest  rate  because  mortgages  and  notes  can  be 
negotiated  on  that  basis.  However,  other  elements  than  in- 
terest, pure  and  simple,  enter  in  nearly  all  such  cases  and  the  real 
interest  rate  is  appreciably  less.  An  idea  may  be  secured  of  the 
prevailing  true  interest  by  the  return  in  the  locality  on  funds  put 
out  with  practically  no  risk  and  requiring  practically  no  effort  of 
the  lender  to  keep  risk  away  and  to  collect  the  income.  Bonds  of 
stable  governments  and  deposits  in  some  savings  banks  are  fair 
indicators  of  unalloyed  interest  —  as  good  perhaps  as  are  easily 
examined.  The  real  interest  rate  corresponding  to  the  5%  or 
6%  noted  as  nominal  popular  figure,  is  frequently  3  or  4%.  The 
difference  compensates  the  leaner,  on  mortgage  and  note  for  in- 
stance, for  his  need  of  scrutiny  at  intervals  of  the  collateral  prop- 
erty value,  for  the  greater  chance  of  losing  principal  or  interest,  for 
the  effort  required  to  collect  the  interest,  etc. 

Compensation  for  Risk.  —  The  business  risk  involved  in  any 
investment  cannot  be  immediately  stated  in  definite  figures  —  as 
it  can  only  be  estimated  rather  than  measured  and  as  its  esti- 
mation is,  within  limits,  a  matter  of  judgment.  However,  it  is 
axiomatic  that  an  individual  mortgage  is  more  risky  than  a 
savings  bank  account  and  the  latter  in  turn  more  so  than  a  govern- 
ment bond.  All  admit  the  respectively  increasing  uncertainty  in 
manufacturing,  mercantile  pursuits,  railroads,  agriculture,  mining 
enterprises,  etc.  About  the  nearest  approach  to  a  logical  scrutiny 
of  the  risk  in  a  given  public-utility  business  is  to  study  its  organi- 
zation, stockholders,  customers,  locality,  development,  earnings, 
etc.,  and  to  exercise  judgment  in  comparing  the  risk  with  that  in 
any  local  manufacturing,  mercantile  business,  agriculture,  railroad- 
ing, or  mining,  the  returns  from  which  can  be  found. 

Factors  Increasing  Risk.  —  The  risk  of  investing  in  any  in- 
dustrial enterprise  may  be  reasonably  held  to  depend  on  a  few 
factors  such  as  (1)  the  soundness  of  its  early  organization,  financing 
and  management;  (2)  the  honesty  and  ability  of  the  present 
management,  the  present  business  status  of  the  concern  and  the 
present  effect  of  its  early  history  —  either  good  or  bad;  (3)  the 
possibilities,  probabilities  and  extent  of  competition;  (4)  the 


98  PUBLIC  UTILITY  RATES 

ability  to  hold  the  market  and  maintain  gross  earnings,  the  pro- 
tection afforded  against  ruinously  low  prices,  the  probability  of 
raising  prices  or  rates  parallel  with  the  movement  of  wages, 
materials  and  general  expenses,  the  probability  of  continued  good 
management  or  better;  (5)  the  probability  of  increase  in  taxes, 
in  prices  of  materials  and  in  wages  of  labor,  etc. 

If  in  the  case  of  any  particular  utility,  we  could  study  certain 
other  local  industrial  projects  paying  good  dividends,  light  might 
be  thrown  on  the  effect  of  these  factors  in  definite  percentages. 
For  instance,  take  a  hypothetical  manufacturing  concern  paying 
9%  but  with  its  stock  hovering  a  little  above  par  —  this  would 
indicate  the  probable  existence  of  considerable  risk  to  the  in- 
vestors. If  local  bonds  were  yielding  4%,  savings  banks  paying 
4%  and  3|%  on  small  and  large  accounts  respectively;  the  5% 
difference  might  be  largely  considered  as  extra  compensation  for 
risk,  scrutiny  and  effort.  Suppose  study  disclosed  a  variegated 
past  which  had  not  been  wholly  lived  down,  although  the  present 
management  was  capable,  high  minded  and  well  intrenched. 
Suppose  that  there  was  great  potential  competition  to  be  reckoned 
with,  that  taxes  had  been  temporarily  set  aside  by  local  au- 
thorities, prices  of  wages  and  materials  fairly  low  but  bound  to 
go  higher.  Assume  that  our  investigation  showed  the  probable 
weight  of  these  elements  of  uncertainty  as;  history  (1),  compe- 
tition (3),  taxes,  wages  and  material  (4).  The  sum  of  these  weights 
is  eight  and  corresponds  to  the  added  return  percentage  secured. 
Then  transferring  these  ideas  to  the  utility  in  question  (having 
much  the  same  risks),  we  could  add  |%  for  poor  history  as  a 
money  maker,  nothing  for  competition  (being  a  protected  monop- 
oly), 2|%  for  expected  rise  in  cost  of  taxes,  operation,  etc.  This 
makes  some  3%  extra  above  mere  interest  for  risk  and  perhaps 
another  f  %  could  be  tacked  on  for  the  need  of  extra  attention  of 
stockholders  in  an  enterprise  which  needed  good  directors  but  had 
once  attracted  undesirable  ones  by  the  opportunities  for  undue 
exploitation. 

Compensation  for  Attention.  —  One  difficulty  that  enters  the 
comparison  of  a  public  utility  with  local  businesses,  as  to  rela- 
tive risks,  is  the  fact  that  in  them  all  there  also  enters  the  variable 
amount  of  attention  demanded  of  the  investor  from  time  to  time. 

Before  the  rise  of  the  modern  artificial  business  individuals  — 
the  corporations  —  investors  and  managers  were  more  nearly 


REASONABLE  RETURN  99 

identical.  The  single  man,  or  the  few,  who  furnished  the  funds 
for  an  enterprise,  and  carried  the  risks,  also  managed  the  business. 
But  under  modern  conditions,  those  who  have  capital  to  put  out 
seem  to  prefer  to  scatter  it  among  the  larger  organizations  in- 
stead of  burying  it  in  their  own  business,  and  they  thereby  lose 
much  or  all  of  the  direction  of  the  employment  of  their  funds. 
As  stockholders,  they  still  carry  the  risks  of  the  business  and,  in 
theory,  while  they  do  not  immediately  direct  the  routine,  they 
control  the  policies  of  the  managers  through  the  directors  (whom 
the  stockholders  elect).  But  if  a  stockholder  owns  only  a  small 
part  of  the  shares  outstanding,  his  voice  in  the  affairs  of  a  concern 
may  be  very  small  unless  he  agrees  with  the  more  powerful  in- 
terests, or  possesses  a  vigorous  personality,  or  can  show  illegal 
acts  of  other  stockholders.  The  attention  to  directors  required 
of  majority  stockholders  may  affect  the  return  on  all  stock,  and 
the  minority  holders  get  an  "unearned  increment"  —  or  a  return 
for  their  slightly  greater  risk,  through  lack  of  voice. 

If  the  investment  is  in  bonds  of  the  corporation,  the  bond- 
holder has  practically  no  voice  in  the  management  of  the  con- 
cern's affairs  beyond  protecting  the  security  offered  for  the  bond. 
Naturally  if  the  risk  is  less  than  with  stock,  the  rate  of  return  is 
less.  It  is  less  also  because  the  bondholder  has  less  demand  on 
his  attention  than  the  stockholder.  The  larger  the  proportion  of 
bonds  a  corporation  carries,  the  greater  the  risk  assumed  by  the 
stockholders  and  the  greater  amount  of  attention,  correspondingly, 
both  directors  and  important  stockholders  have  to  give  to  the 
business  and  its  safety. 

It  is  seen,  therefore,  that  the  three  variables,  interest,  risk,  and 
attention,  are  peculiarly  interwoven  in  any  corporation.  Any 
estimation  of  one  or  all  obviously  is  so  much  a  matter  of  personal 
judgment,  that  hard  and  fast  rules  cannot  be  made  for  com- 
paring a  public  utility  with  another  local  business,  to  see  how  the 
returns  go  along  with  the  degree  of  risk,  and  attention.  Judg- 
ment should  be  based,  however,  on  a  logical  and  scientific  scrutiny 
more  or  less  as  indicated. 

Prospect  of  Extra  Profits.  —  In  the  days  of  smaller  business 
units,  the  investor-manager  himself  supervised  that  combina- 
tion of  capital  and  labor  that  resulted  in  product  or  service. 
He  planned  the  output,  superintended  the  operation,  found  the 
market,  and  collected  the  revenues.  He  aimed  to  secure  a  fair 


100  PUBLIC  UTILITY  RATES 

rate  of  interest,  to  insure  the  risk  of  loss,  to  earn  the  equivalent  of 
an  undefined  salary,  to  pile  up  surplus  profits  over  interest  ac- 
cording to  his  ability  as  an  economizer  (an  "efficiency  expert") 
or  a  bargainer.  In  a  corporation  with  large  affairs,  the  managers 
are  salaried  officers  whose  pay  is,  or  should  be,  ample  to  secure 
the  same  ability  to  plan,  to  superintend  operation,  to  develop  the 
markets  and  to  collect  the  revenue.  The  risks  of  the  business, 
however,  are  not  borne  by  the  managers,  for,  distinctly  as  man- 
agers, they  have  usually  no  financial  interest  in  it.  In  some 
cases,  stockholders  and  directors  may  have  transferred  their 
functions  largely  to  the  salaried  managers,  though  still  carrying 
the  risk  of  stocks  and  bonds. 

In  private  business,  the  sometimes  apparently  high  profits 
above  interest  may  often  include  the  manager's  wage  for  at- 
tention; in  the  corporation,  especially  the  utility  corporation, 
the  wage  of  management  has  already  entered  the  operating  ex- 
pense and  should  not  be  further  considered  in  demands  for  profits. 
The  business  handled  by  the  corporation  manager  is  frequently 
more  or  less  speculative  —  there  is  some  uncertainty  of  his  mak- 
ing a  profitable  use  of  labor  and  money,  of  the  stability  of  the 
market  he  finds,  of  his  ability  to  collect  the  revenue.  Yet  all  the 
salaried  manager  risks  is  his  situation  and  pay;  the  stockholder 
bears  the  burden  and  this  is  additionally  heavy  since  he  neces- 
sarily must  depend  on  the  skill,  knowledge,  foresight,  tact  and 
honesty  of  his  hired  agents.  Such  situations  must  be  considered 
in  finding  what  return  will  attract  capital,  and  in  comparing  local 
industries. 

There  is  a  certain  amount  of  inherent  reduction  to  these  added 
burdens  of  risk  in  corporate  business,  resulting  from  the  truly 
monopolistic  nature  of  a  few  utilities.  Obviously  greater  risks 
are  met  in  competitive  business  through  ungoverned  markets  and 
prices,  improvement  in  competitors'  arts,  reliance  on  patent  and 
secret  advantages  of  inherent  instability.  With  utilities  there  is, 
to  be  sure,  the  menace  of  potential  competition  by  temporarily 
outclassed  services,  but  this  change  is  generally  so  slow  that  the 
first  art  and  science  has  a  chance  to  make  compensating  advance. 

It  appears  probable  that  if  there  is  the  possibility  of  earning 
1  to  3%  on  the  value  of  an  utility  plant  as  extra  profits  above  in- 
terest, risk  and  attention,  capital  should  be  forthcoming  in  times 
of  normal  activity  and  good  business.  However,  instead  of  being 


REASONABLE  RETURN  101 

a  blind  allowance  which  any  who  rush  in  may  secure,  such  surplus 
profits  should  be  automatically  developed  when  stockholders  and 
directors  show  constructive  shrewdness,  ability  to  develop  at  un- 
usual advantage,  ability  to  perform  ever  more  adequate  service, 
ability  to  improve  efficiency  of  production  and  to  decrease  cost 
of  service,  willingness  to  maintain  a  broad  and  beneficent  public 
policy,  deep-seated  desire  to  win  and  maintain  public  confidence,  etc. 

Super-profits  through  Infrequent  Rate  Revisions.  —  It  is  not 
generally  well,  in  fixing  a  fair  rate,  that  excess  profits  should  be 
immediately  included  in  the  rate  of  return;  in  many  cases  it  is 
sufficient  to  leave  an  open  door  for  their  development.  For  in- 
stance, where  there  is  expected,  more  than  realized,  an  unusual 
ability  to  perform  more  and  more  adequate  service  and  to  present 
more  and  more  beneficent  public  policies,  there  may  be  a  tacit 
agreement  that  rates  will  be  undisturbed  for  a  considerable  period, 
during  which  term  the  company  secures  the  full  benefit  of  its 
advances  in  the  art  and  its  search  for  economies. 

Dividing  Scales.  —  A  plan  of  dividing  the  benefit  of  develop- 
ments between  utility  and  customer,  while  strongly  encouraging 
economy  and  efficiency  in  operation,  is  seen  in  the  so-called 
"London  sliding  scale"  for  gas  companies.  Throughout  Great 
Britain  it  is  common  to  allow  an  increase  of  |%  over  the  standard 
or  base  dividend  for  each  penny  (2c.)  reduction  below  a  standard 
price.  But  in  Britain  frequently  only  the  early  issues  of  stock 
have  been  allowed  to  earn  say  10%  while  later  issues  of  an  es- 
tablished concern  have  been  set  at  7%,  5%,  3.5%  base  rate.  On 
the  low-rate  shares,  a  common  increment  has  been  ?V%  for  the 
7%  issues  and  |%  for  the  5%  capital.  Similarly,  in  Massachu- 
setts, the  Boston  Consolidated  Gas  Light  Co.  was  authorized  to 
pay  dividends,  increased  over  7%,  by  \%  for  every  Ic.  reduction  • 
in  retail  price  for  gas  below  90c.  per  1000  cu.  ft. 

Of  course  these  particular  so-called  "sliding  scales"*  seem  more 
or  less  arbitrary  and  under  them  the  consumer  has  often  secured 
the  lion's  share  of  benefit.*  However,  it  is  possible  logically  to 
apportion  the  dividend  increment  and  price  decrement  so  that  the 
benefit  is  otherwise  divided  (as  early  pointed  out  by  the  late 
W.  D.  Marks  in  Engineering  News,  Aug.  26,  1909). 

*  The  term  "  dividing  scale"  has  been  used  hereafter  In  this  work  as  being 
more  truly  expressive  —  especially  in  view  of  the  common  use  of  the  other 
term  to  indicate  a  scale  of  prices  changing  with  quantity  purchased. 


102  PUBLIC  UTILITY  RATES 

Assume,  for  example,  that  half  the  benefit  is  to  go  to  the  com- 
pany and  hah*  to  the  customers;  then  half  the  profit  (per  unit  of 
service  or  product)  equals  the  rate  reduction.  Expressed  in 
mathematical  form: 

p  —  ma  —  c 

T  = . 

2 

r  =  cents  reduction  in  unit  price  of  service  or  product. 

p  =  standard  fair  unit  price,  cents. 

c  =  cost  of  delivering  a  unit  of  product  or  service  (including 
interest  on  bonds,  preferred  .dividends,  fixed  charges, 
depreciation  compensation,  etc.),  cents. 

m  =  proportional  amount  of  stock  (cents  per  unit  of  quantity  of 
product  or  service  sold  per  year)  benefiting  from  the 
dividing  scale. 

a  =  standard  dividend  rate  (expressed  as  a  decimal)  on  benefit- 
ing stock. 

Also,  the  cents  increased  return  on  stock  per  unit  of  product  (m) 
is  equal  to  the  cents  price  reduction  per  service  unit  (r).  If  we 
denote  by  x,  the  increase  of  dividend  for  each  cent  of  price  re- 
duction, then 

mrx  =  r  and  x  —  l/m. 

These  expressions  are  very  convenient  in  applying  the  ap- 
portionment to  actual  cases,  it  being  understood  that  the  "rate" 
is  the  resultant  of  all  the  actual  tariffs  and  that  the  further  dis- 
tribution of  the  reduction  is  a  complicated  procedure.  Therefore 
such  scales  are  more  easily  applied  to  utilities  having  a  simple 
rate  or  charge,  like  many  gas  and  water  concerns  and  street 
railways. 

The  apportionment  has  been  applied  to  a  composite  of  eight 
gas  companies  in  Massachusetts  selling  gas  by  the  thousand  cubic 
feet.  From  their  reports : 

p  =  90  r  =  4.99 

c  =  60  x  =  0.0055 

a  =  0.11  a  +  rx  =  0.1375,  or 
m  =  182  13f  %  new  dividend. 

Applying  to  the  Cleveland  electric  railways  in  1909,  the  fol- 
lowing figures  resulted: 


REASONABLE  RETURN  103 

m  =  18  a  =  0.05 

c  =  3  r  =  0.05 

p  =  4  x  =  0.0556 

The  standard  profit  then  is  0.05  X  18  =  0.9c.  per  passenger  fare 
compared  with  the  actual  of  Ic.  on  the  books.  But  as  reduction 
could  easily  come  only  in  Ic.  steps,  such  a  low  fare  would  be 
possible  only  after  a  large  increase  in  economy  and  traffic  so  that 
"m"  and  "c"  are  reduced.  For  the  Ic.  reduction  to  be  safe,  ap- 
plying the  above  expressions, 

4  -  (0.05  m  +  c) 
2 

and,  0.05  m  +  c  =  2, 

which  would  be  satisfied  if  unit  cost,  c  =  1.8  and  unit  stock, 

m  =  4;  if  c  =  1.9  and  m  =  2.0;  or  if  c  =  1.99  and  m  =  0.2. 

This  "dividing  scale"  apportionment  may  also  provide  for  the 
possibility  of  raising  prices  above  a  standard  and  decreasing 
dividends  in  case  it  is  desirable  to  share  with  customers  the  effect 
of  a  drop  in  sales,  a  decrease  in  economy  or  even  an  increase  in 
cost  of  labor  and  material  —  though  it  is  very  questionable 
whether  or  not  all  the  last  item  should  not  fall  on  the  consumers' 
prices  instead  of  investors'  dividends. 

Suppose  that  in  the  composite  of  ten  gas  companies,  it  was  seen 
that 

p  =  90c.,  a  =  0.11,  c  =  75c.  and  m  =  190c. 
Then 

90  -  190  X  0.11  -  75         0  ftc 

r  =  -          — ^—   =  — 2.95c., 

u 

the  negative  result  signifying  increase  of  price  to  93c.  The 
dividend  decrease  would  be 

x  =  1/190  =  0.00526, 
a  +  rx  =  0.11  -  (2.95  X  0.00526)  =  0.095, 
or  9.5%  instead  of  the  old  11%. 

It  is  by  no  means  necessary  that  the  surplus  profits  be  divided 
into  two  equal  parts,  one  going  to  consumer  and  one  to  company. 
There  can  be  any  desired  arrangement  —  say  one-third  for  the 
company,  one-third  for  the  customers  and  one-third  for  the  local 
government.  Then  the  expression  before  given  reads 

p  —  ma  —  c 

r  = . 

3 


104  PUBLIC  UTILITY  RATES 

The  total  divisible  surplus  is  now  3r  but  if  the  extra  dividends 
still  equal  the  price  reduction,  the  expression 

x  =  1/m  holds. 

What  is  a  Fair  Division  of  Excess  Profits.  —  There  is  a  certain 
superficial  air  of  fairness  about  splitting  the  benefit  equally  be- 
tween an  utility  and  the  customers,  but  this  plausibility  is  dimin- 
ished after  noting  that  the  dividend  increments  ordinarily  are 
cumulative  and  that  the  reward  for  advance  made  by  the  company 
is  analogous  to  an  individual's  patent.  The  inventor  is  allowed  to 
reap  his  reward  only  for  a  period;  each  generation  of  utility 
managers  should  have  to  make  its  own  advances  rather  than  con- 
tinue forever  to  reap  the  rewards  of  its  predecessors.  The  logical 
expectation  would  be  that  each  dividend  increment  should  run 
only  for  a  fair  period  —  say,  5  to  20  years.  Greatly  reducing 
the  premiums  and  neglecting  the  cumulative  action,  which  was 
the  course  followed  in  England,  may  be  regarded  as  an  easy  make- 
shift aimed  to  secure  the  same  end. 

The  proportion  of  the  excess  profits  over  a  common  fair  return 
that  should  go  to  the  utility  customers  obviously  depends  in  a 
measure  on  the  growth  of  a  community,  the  price  of  material 
and  labor,  and  on  that  normal  development  of  the  art  in  which 
the  local  manager  has  no  part;  the  company  part  depends  all  or 
nearly  all  on  increases  in  operating  efficiency,  on  extensions  of 
service,  on  improvement  of  load  factor,  and  on  reduction  of  capital 
costs. 

In  England  it  is  not  believed  that  equal  division  of  surplus 
profits  would  have  worked  as  well  in  the  gas  industry  for  either 
public  or  companies.  It  is  reported  (R.  H.  Whitten,  Appendix  to 
Annual  Report  for  1913,  Public  Service  Commission,  First  Dis- 
trict, State  of  New  York)  that  for  18  leading  British  concerns  the 
ratio  of  dividend  premium  to  price  reduction,  both  expressed  per 
thousand  cubic  feet  of  gas  sold,  at  first  averaged  1  :  3.8,  but  by 
1911  had  fallen  to  1:7.  The  maximum  was  1  : 4.6  and  the 
minimum  1  :  20.  It  is  not  thought  in  England  that  greater 
economies  could  have  been  produced  had  the  premiums  been 
greater  —  and  the  aim  was  to  allow  only  the  smallest  incentive 
that  would  stimulate  maximum  possible  price  reduction;  too 
great  a  premium  was  considered  "easy  money"  and  a  hindrance 
to  continual  progress.  A  typical  concern  (Luton  Gas  Co.)  sells 


REASONABLE  RETURN  105 

gas  for  48c.  below  the  standard  price.  The  premium  dividend  is 
6%  on  ordinary  10%  shares,  being  a  burden  of  2.4c.  per  thousand 
cubic  feet  of  gas  sold.  This  is  ^  of  the  price  reduction. 

Freedom  from  Lax  Management.  —  Willingness  to  allow  a 
concern  to  develop  surplus  profits  by  unusual  attainments  in 
service,  economy,  contributions  to  public  welfare,  etc.,  should  not 
degenerate  into  giving  special  rewards  for  freedom  from  lax 
management,  or  from  mere  failure  to  drop  beneath  common 
standards  as  to  adequacy  of  service,  cost  of  supply,  or  public 
policy.  The  public  utility  may  be  regarded  as  being  under  con- 
straint to  live  up  to  reasonable  standards  without  claim  for  surplus 
profits. 

Except  in  the  matter  of  dividing  scales,  no  standards  have  been 
set  as  to  how  much  surplus  profit  should  be  allowed  for  super- 
standard  service,  etc.  A  commission  wishing  to  make  utility  in- 
vestments in  its  state  attractive  to  capital  (without  injustice  to 
public  and  customers)  could  without  much  serious  difficulty  make 
up  tentative  and  flexible  standards  of  management,  public  policy, 
welfare  work  among  employees,  etc.,  and  give  some  rough  esti- 
mate of  how  improvement  would  be  measured  quantitatively  and 
how  far  judgment  of  profits  would  be  affected  thereby. 

Surplus  Profits  as  Compensation  for  Early  Inadequate  Re- 
turn. —  It  is  common  to  read  in  utility-commission  reports 
that  the  latter-year  returns  have  been  examined  to  see  if  they 
make  up  for  the  deficiencies  of  early  years.  So  far  as  has  been 
seen  there  has  been  no  scientific  or  logical  comparison  of  return 
in  these  periods  —  nor  is  one  easy.  For  instance  a  report  may 
state  that  "the  net  earnings  recently  have  been  8%  or  9%  (or 
more)  on  the  present  value  of  the  property  and  that  this  should 
compensate  for  the  3%  and  4%  (or  less)  of  much  earlier  years." 
Generally  data  is  not  complete  for  definitely  formulating  the  extra 
return  that  should  come  today  truly  to  compensate  the  stock- 
holder for  lean  years  at  the  start;  it  seems  a  more  accurate 
process  to  include  deficits  in  business-development  costs. 

Official  Burdens  not  a  Basis  for  Profits.  —  One  plea  for  higher 
dividend  rates  of  public  utilities  which  has  been  heard  in  various 
parts  of  this  country  runs  as  follows: 

"This  industry  is  by  no  means  a  pleasant  one  for  those  engaged  in  it. 
It  is  fraught  with  annoyances,  unpleasantnesses  and  extraordinary 
hazards.  If  we  are  to  be  limited  to  .6  or  7%  as  a  maximum  earning 


106  PUBLIC  UTILITY  RATES 

after  bearing  all  these  hazards  and  annoyances  and  after  going  through 
the  lean  years  necessary  with  all  new  enterprises,  then  I  would  rather  go 
into  other  business." 

Such  arguments  indicate  a  subtle,  though  probably  uncon- 
scious, attempt  to  throw  an  undue  burden  on  customers.  Of 
course,  as  already  emphasized,  there  should  be  due  compensation 
to  investors  for  attention,  use  of  money  and  risks  of  investment. 
But  the  trouble  and  grief  of  the  officers  is  not  an  excuse  for  larger 
income  to  the  stockholders.  The  fallacy  in  such  arguments  as 
that  quoted  is  not  so  plain  if  the  officers  have  not  completely 
separated  their  relations  as  employees  and  stockholders  of  the 
corporation.  It  is  the  function  of  the  officers  to  bear  the  annoy- 
ances and  unpleasant  features  of  the  business.  Salaries  are,  and 
properly  should  be,  affected  by  the  conditions  under  which  these 
men  labor;  but  there  has  not  yet  been  pointed  out  any  reason 
for  increasing  the  rate  of  return  to  stockholders  on  that  account. 


CHAPTER  VIII 
DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES 

Liability  for  Retirement.  —  Where  maintenance  and  repairs 
are  well  cared  for,  obviously  for  a  long  time  the  plant  suffers  no 
reduction  in  ability  to  render  service.  Its  service  ability  (called 
by  some  "service  value")  is  100%.  Of  course,  the  time  must 
come,  in  a  more  or  less  foreseen  number  of  years,  when  repairs 
no  longer  can  suffice  to  maintain  service,  and  retirement  becomes 
advisable  or  absolutely  necessary. 

But  such  wear-deterioration  is  not  the  only  effect  to  be  noted 
as  causing  retirements.  When  the  demands  for  service  from  a 
popular  and  growing  utility  outstrip  the  designed  capacity  of  the 
system,  then  the  extra  service  can  be  performed,  if  at  all,  with 
various  sacrifices  of  efficiency  and  quality.  Too  small  electricity, 
gas,  water  and  sewer  mains,  and  too  small  street  cars  for  the 
crowds  that  try  to  "board  are  common  examples. 

Differing  from  the  simple  inadequacy  described  are  the  con- 
ditions which  arise  with  an  old  plant  when  advances  in  an  art  or 
science  have  made  the  service  of  the  given  equipment  less  safe, 
less  economical,  or  less  attractive,  though  still  adequate.  For  ex- 
ample, it  is  only  necessary  to  cite  the  replacement  of  cable  and 
horse-car  lines  by  electric  tramways,  the  use  of  tungsten-filament 
lamps  in  place  of  carbon,  underground  electric  cables  for  overhead 
wires,  steam  turbines  for  reciprocating  engines,  steel  railway  cars 
for  wood,  etc. 

Beyond  wear-deterioration,  inadequacy,  supercession  and  an- 
tiquation,  there  is  a  natural  dilapidation  which  arises  merely 
from  age,  though  in  practice  not  easily  distinguished  from  that 
irreparable  deterioration  which  springs  from  continued  wear  and 
tear.  Structures  corrode,  shrink,  crack,  or  rot  on  mere  exposure 
to  the  elements  without  use;  the  insulation  of  electrical  equip- 
ment grows  weak;  pipe  lines  rust  and  clog  and  leak,  and  a  variety 
of  phenomena  can  be  traced  solely  to  the  ravages  of  time. 

The  responsibility  for  making  changes  hi  equipment  on  account 
of  these  actions  is  a  contingent  liability  of  the  operating  concern. 
If  it  should  sell  out,  the  purchasers  would  have  to  assume  the 

107 


108  PUBLIC  UTILITY  RATES 

burden  and  therefore  would  demand  a  deduction  from  a  full-cost 
price.  If  the  business  could  cease  at  the  retirement  period  for  the 
first  investment,  then  the  concern  would  suffer  the  loss  of  its 
early  funds  unless  it  had  received  very  large  dividends,  had  re- 
tired its  indebtedness,  had  accumulated  a  proper  reserve,  or  had 
spent  for  other  equipment  an  equivalent  sum  out  of  the  receipts 
beyond  all  the  normal  expenses  and  reasonable  profits.  There- 
fore, there  must  be  a  certain  growing  reduction  in  the  value  of 
the  parts  of  a  plant  with  the  passing  of  the  years  of  service,  even 
though  that  service  might  continue  to  be  given  at  100%  of  original 
quantity  and  quality.  This  loss  of  value  is  "  depreciation,"  in  the 
most  generally  accepted  meaning  of  the  term  —  though  so  many 
other  uses  of  the  word  have  sprung  up  that  endless  confusion 
usually  arises  in  discussions  participated  in  by  several  persons. 

"  Depreciation  "  Too  Loosely  Employed.  —  The  meanings 
which  have  been  given  to  the  term  "depreciation"  are  seen  to  fall 
into  two  general  classes:  (a)  losses  in  value  of  physical  property, 
and  (6)  sums  secured  from  earnings  to  offset  loss  in  value  of 
property. 

The  first  group  of  definitions  of  "depreciation"  is  further 
divided  into:  (1)  aggregate  actual  or  estimated  loss  in  value  from 
all  causes,  (2)  the  loss  in  value  due  to  wear-  and  age-deterioration 
as  distinguished  from  the  loss  of  value  from  liability  of  obsoletion 
or  inadequacy,  (3)  the  loss  in  value  due  to  loss  of  ability  to  render 
full  service  or  to  decreased  efficiency. 

The  second  group  of  definitions  is  seen  to  be  split  into:  (4)  an 
annual  accounting  figure  representing  the  depreciation  for  the 
year,  or  any  other  given  period,  deducted  from  gross  earnings  in 
computing  probable  true  net  earnings;  (5)  an  annual  sum  used 
in  making  up  the  amount  of  necessary  income  to  be  secured  by 
the  rates.  This  last  is  often  an  annual  amount  to  be  set  aside 
out  of  the  earnings  to  help  create  a  reserve  which  will  equal  the 
cost  of  the  several  items  of  plant  when  they  are  retired  from  service, 
and  will  pay  for  the  renewals  to  the  extent  of  the  cost  of  the  items 
retired.  It  might  well  be  a  direct  repayment  out  of  earnings  of 
investment,  equal  to  the  annual  loss  in  value  of  property  due  to 
depreciation.  There  is  a  final  observable  definition  of  depreciation 
as  (6)  various  aggregates  of  the  annual  sums  secured  from  time 
to  time  to  compensate  for  loss  in  value  through  depreciation. 

The  various  shades  of  meaning  indicated  in  these  definitions 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       109 

explain  the  extreme  confusion  which  has  been  introduced  into 
discussions  of  depreciation  and  the  need  of  greatly  restricting  the 
use  of  the  term.  Language  is  not  so  impoverished  that  it  is 
necessary  to  use  the  single  word  in  so  many  senses. 

"  Depreciation  "  Properly  Used.  —  The  first  definition  —  as 
the  aggregate  loss  in  value  from  wear-deterioration,  inadequacy, 
supercession,  antiquation,  delapidation,  etc.,  —  is  probably  the 
most  used  and  the  original  one.  This  can  well  be  adhered  to,  and 
a  few  available  terms  employed  to  carry  the  other  meanings  given. 

The  idea  involved  in  the  second  definition  makes  a  most  useful 
distinction  which  should  be  preserved,  but  it  is  more  definitely 
indicated  by  "wear-deterioration,"  "age-deterioration"  or  "wear- 
and-age  deterioration"  according  to  the  precise  shade  of  meaning 
needed. 

The  third  definition  —  loss  in  value  due  to  diminished  power 
to  function  or  decreased  efficiency  —  has  no  real  place  in  depreci- 
ation discussions,  for  mere  ability  to  render  the  original  service 
does  not  indicate  lack  of  depreciation,  and  percentage  of  service 
ability  (which  is  not  the  "serviceability"  of  the  dictionary)  alone 
does  not  measure  value.  (It  indicates  relative  value  only  when 
the  duration  of  that  percentage  of  service  ability  is  considered; 
if  one  machine  can  yield  certain  service  for  10  years  and  a  second 
machine  can  yield  the  same  sendee  for  20  years  their  real  values 
are  not  equal.)  Instead  of  speaking  of  this  loss  of  service  ability 
as  depreciation  it  should  be  called  "service-ability  drop"  or  some 
equivalent. 

The  fourth  definition  has  sprung  up  to  give  a  short  expression 
equivalent  to  "deductions  for  depreciation  expense,"  or  something 
like  that.  If  there  were  not  so  many  definitions  in  the  field  need- 
ing weeding  out,  its  abbreviation  to  "depreciation"  would  be 
excusable;  but,  because  of  the  confusion  this  induces,  the  longer 
phrase  should  be  reverted  to. 

Similarly  in  the  case  of  the  fifth  definition  it  is  advisable  to  say 
"allowance  for  depreciation  expense,"  or  more  briefly  "depreci- 
ation allowance, "  and  not  merely  "  depreciation. "  Between  speed 
of  speech  and  accuracy  of  expression  there  should  be  no  question 
of  choice.  Depreciation-allowances  correspond  to  what  some 
engineers  call  a  "theoretical  depreciation"  in  contrast  with  what 
they  designate  as  "actual  depreciation"  (meaning  wear-deteriora- 
tion) found  by  examination. 


110  PUBLIC  UTILITY  RATES 

Definition  five  conveniently  reduces  to  "renewal  allowance" 
and  for  further  simplicity  to  the  coined  word  "renewance"  which 
the  author  has  found  generally  understandable.  The  first  and  the 
fifth  definitions  are  perhaps  the  ones  most  used,  so  that  it  is  a  great 
advance  to  agree  to  speak  of  "depreciation"  as  the  actual  lost 
value,  and  "renewance"  as  one  year's  part  of  the  compensation 
therefor. 

However,  it  is  little  more  than  a  convenient  fiction  to  speak  of 
building  up  reserves  for  renewals,  since  those  funds  have  no  rela- 
tion to  the  amounts  spent  for  the  new  equipments.  Electric 
railways  have  been  known  to  scrap  their  generating  stations  and 
purchase  power  from  central-station  companies  (notable  examples 
being  the  Cleveland,  Ohio,  Railway  Co.,  and  the  Third  Ave.  R.R. 
in  New  York  City).  In  general,  replacements  are  made  with 
radically  different  equipment.  What  the  business  must  be  made 
to  yield,  in  line  with  the  Supreme  Court's  dictum,  is  full  compen- 
sation to  the  utility  concern  for  the  loss  in  value  of  property  from 
all  the  various  causes  already  outlined.  That  is  to  say,  the 
rates  must  cover  the  liability  for  retiring  plant  rather  than  the 
cost  of  renewing  it.  "Retirance"  therefore  has  been  substituted 
for  "renewance."  Retirance  then  is  the  annual  amount  to  be 
repaid  the  corporation  to  compensate  it  for  each  year's  depre- 
ciation. Retirance  is  a  definite  factor  in  rates  and  in  its  nature  is 
a  repayment  of  invested  capital.  Unit  retirance  may  be  spoken 
of  as  a  subdivision  of  retirance  as  it  has  been  apportioned  over 
rates.  Wear-retirance,  age-retirance,  obsoletion-retirance,  etc., 
become  useful  special  terms  which  can  be  accurately  employed. 
The  place  of  aggregate  retirance  is  obvious. 

By  such  a  restriction  as  outlined  on  the  employment  of  the  terms 
" depreciation, "  "wear-deterioration, "  "depreciation-allowance," 
"retirance,"  etc.,  discussion  is  not  appreciably  encumbered  and  a 
fundamental  cause  of  exasperating  confusion  is  removed. 

Retirance  a  Repayment  of  Lost  Investment.  —  Whether  or  not 
the  retirance  money  secured  out  of  rates  can  be  regarded  as  a 
repayment  of  investment  is  one  of  the  most  debated  points  that 
has  arisen.  Careful  consideration  of  the  question  (keeping  in 
mind  the  fundamental  idea  that  loss  of  investment,  impairment 
of  capital,  or  assumption  of  liability  for  renewal  must  be  com- 
pensated by  the  customers  in  whose  service  the  loss,  impairment 
or  assumption  arose)  will  seemingly  leave  little  doubt  that  the 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       111 

retirance  collected  is  a  restoration  of  balance  between  physical 
assets  and  incurred  liabilities  (including  stocks  and  bonds). 
That  looks  like  repayment. 

However,  retirance  cannot  be  a  direct  repayment  when  it  is 
purposely  made  smaller  than  the  annual  depreciation  with  a  view 
to  placing  it  in  a  sinking  fund  and  obtaining  the  normal  amount 
through  accumulations  of  interest.  In  this  case  the  retirance 
is  not  free  capital  which  the  owner  of  the  property  may  put  in 
service  to  swell  his  income;  all  the  earnings  must  be  retained  to 
complete  the  retirance  fund  which  can  be  drawn  on  only  when 
an  item  has  reached  its  assumed  length  of  life. 

Subdivision  of  Retirance.  —  It  has  been  stated  already  (p.  24) 
that  in  some  (but  not  all)  rate-making  problems  it  is  useful  to 
keep  retirance  in  component  sums  and  to  apportion  them  among 
the  customers  according  to  the  fundamental  peculiarities  of  the 
several  services.  It  is  not  necessary  to  repeat  here  the  reasons 
for  different  apportionments  but  it  is  useful  perhaps  to  note  that, 
where  any  division  of  depreciation  and  retirance  is  logical,  it  is 
wear-deterioration  that  follows  the  hours  of  plant  service,  and 
wear-retirance  that  may  be  assessed  like  operating  expense  on 
quantity  units;  it  is  antiquation,  obsoletion,  and  inadequacy  that 
depends  on  the  years  which  pass,  and  age-retirance,  etc.,  that  may 
be  assessed,  like  investment-costs,  on  the  demand  units. 

All  action  leading  up  to  -  the  retirement  of  utility  property 
can  be  put  into  these  two  groups  —  the  "wear"  or  the  "age" 
classes.  Even  hastened  decrepitude  (like  the  racking  of  street- 
car bodies)  which  some  regard  as  a  distinct  action,  is  seen  on 
analysis  to  be  essentially  the  same  as  the  unrepairable  wear- 
deterioration  of  machinery  —  about  which  there  is  no  question. 

Expected  length  of  life,  considering  only  wear-deterioration 
must  be  based  on  early  experience  with  apparatus  worn,  or  wear- 
ing down,  to  the  discarding  point.  Expected  life,  considering 
only  obsolescence,  etc.,  is  based  on  the  experience  of  older  appa- 
ratus (and  the  probability  of  newer)  becoming  less  economical  than 
that  available,  or  less  attractive  to  customers,  or  less  adequate 
for  growing  needs,  etc. 

Relations  Between  Depreciation  and  Retirance.  —  It  is  the 
actual  depreciation  which  in  the  long  run  affects  real  profits  — 
considering  actual  values  preserved  as  well  as  net  earnings  secured. 
But  it  is  retirance  which  determines  the  computed,  and  approx- 


112  PUBLIC  UTILITY  RATES 

imated,  profits  and  possible  dividends  from  quarter  to  quarter 
or  year  to  year.  The  annual  increment  in  actual  depreciation  is 
not  necessarily  the  same  as  the  annual  retirance  sum  which  is 
intended  to  cover  it,  though  that  is  the  ideal  sought.  The  most 
that  can  be  said  is  that  the  aggregate  of  retirance  accumulated  on 
an  item  of  property  plus  the  scrap  value  should  equal  the  total  first 
cost  when  the  item  is  discarded  —  no  sooner,  no  later.  Few  can 
estimate  so  happily  as  to  have  their  first  estimate  of  retirance  con- 
tinue to  the  end  without  readjustment.  If  an  examination  of  a 
piece  of  apparatus  showed  that  the  aggregate  of  contributions 
made  against  its  retirement  is  going  to  be  too  large,  then  they 
might  be  decreased  to  such  an  amount  as  will  probably  complete 
the  return  of  cost  at  the  end  of  the  useful  life  of  the  item,  except 
that  the 'rates  should  be  held  steady  rather  than  fluctuating.  The 
reverse  adjustment  would  be  necessary  if  the  aggregate  of  allow- 
ances for  a  number  of  years  proved  to  be  less  than  the  actual  de- 
crease in  worth  shown  by  examination.  This  adjustment  affects 
dividends  and  surplus  rather  than  stable  rate  schedules. 

The  exact  eventual  return  of  cost  through  retirances  can  be 
simply  secured  with  the  sort  of  accounting  required  by  the  Inter- 
state Commerce  Commission.  In  following  its  rules  monthly 
charges  against  depreciation  are  made,  based  on  expectation  of 
life.  If  an  item  lasts  longer  than  anticipated,  the  retirance 
charges  stop  when  100%  of  its  cost  has  been  reached.  If  the  life 
for  any  reason  is  shorter  than  expected  the  unreturned  balance  is 
used  to  swell  the  depreciation-expense  account  for  the  year,  or 
for  large  sums,  the  balance  is  put  into  a  suspense  account  and 
spread  over  several  years. 

Relations  Between  Appraised  Value  and  Retirance.  —  It 
must  not  be  expected  that  the  valuation  figures  of  a  property, 
even  though  based  on  a  good  appraisal,  plus  the  aggregate  of  all 
retirance  moneys  secured  out  of  rates,  will  any  more  than  roughly 
approximate  the  reproduction  cost  of  the  property  or  the  legiti- 
mate investment  historically  established.  The  reasons  are  fairly 
obvious.  Among  other  things  the  value  may  be  based  on  changing 
unit  prices;  appreciation  of  property  may  enter.  The  retirement 
allowances,  as  assessed  on  customers,  are  weighted  composites  for 
the  various  items  that  make  up  the  whole  plant.  With  uniformity 
and  stability  of  rates  over  a  given  short  period  of  time,  the  annual 
retirance  at  first  would  usually  accumulate  faster  than  observable 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES      113 

composite  depreciation  would  accrue.  The  deterioration  of  ma- 
chinery seems  to  become  more  obvious  in  the  last  years  of  its 
service  than  in  the  earliest;  and  part  of  the  retirance  covers  an 
antiquation  which  descends  swiftly  and,  though  impending,  may 
not  be  seen  by  the  appraiser. 

Failures  to  Collect  Retirance.  —  Where  retirance  money  has 
not  been  collected,  through  the  error  and  oversight  of  officials 
or  neglect  to  charge  sufficient  rates,  then  according  to  the  Knox- 
ville  case  decision  the  company  still  is  entitled  to  earn  only  on  its 
depreciated  value  of  property.  This  view  has  been  assailed  by 
many  prominent  engineers  and  the  hope  has  been  cherished  by 
them  that  the  Supreme  Court  would  reverse  itself.  It  is  of  inter- 
est therefore  to  examine  this  part  of  the  decision  in  question 
(City  of  Knoxville  v.  Knoxville  Water  Co.,  1909;  29  Sup.  Ct.  Rep. 
148)  to  find  its  basis  in  law  and  economics. 

The  company's  original  case  was  based  on  an  elaborate  analysis  of  the 
cost  of  construction.  To  arrive  at  the  present  value  of  the  plant  large 
deductions  were  made  on  account  of  the  depreciation.  This  depreciation 
was  divided  into  complete  depreciation  and  incomplete  depreciation. 
The  complete  depreciation  represented  that  part  of  the  original  plant 
which  through  destruction  or  obsolescence  had  actually  perished  as  useful 
property.  The  incomplete  depreciation  represented  the  impairment  in 
value  of  the  parts  of  the  plant  which  remained  in  existence  and  were  con- 
tinued in  use.  It  was  urgently  contended  that,  in  fixing  upon  the  value 
of  the  plant  upon  which  the  company  was  entitled  to  earn  a  reasonable 
return,  the  amounts  of  complete  and  incomplete  depreciation  should  be 
added  to  the  present  value  of  the  surviving  parts.  The  court  refused  to 
approve  this  method  and  we  think  properly  refused. 

A  water  plant  with  all  its  additions  begins  to  depreciate  in  value  from 
the  moment  of  its  use.  Before  coming  to  the  question  of  profits,  the 
company  is  entitled  to  earn  a  sufficient  sum  annually  to  provide  not  only 
for  current  repairs,  but  for  making  good  the  depreciation  and  replacing 
the  parts  of  the  property  when  they  come  to  the  end  of  their  life.  The 
company  is  not  bound  to  see  its  property  gradually  waste  without  making 
provision  out  of  earnings  for  its  replacement.  It  is  entitled  to  see  that 
from  earnings  the  value  of  the  property  invested  is  kept  unimpaired,  so 
that  at  the  end  of  any  given  term  of  years,  the  original  investment  re- 
mains as  it  was  at  the  beginning.  It  is  not  only  the  right  of  the  company 
to  make  such  a  provision,  but  it  is  its  duty  to  its  bond-  and  stockhold- 
ers, and  in  the  case  of  a  public-service  corporation,  at  least,  its  plain 
duty  to  the  public.  If  a  different  course  were  pursued,  the  only  method 
of  providing  for  replacement  of  property  which  had  ceased  to  be  useful 


114  PUBLIC  UTILITY  RATES 

would  be  the  investment  of  new  capital  and  the  issue  of  new  bonds  or 
stocks.  This  course  would  lead  to  a  constantly  increasing  variance  be- 
tween present  value  and  bond  and  stock  capitalization  —  a  tendency 
which  would  inevitably  lead  to  disaster  either  to  the  stockholders  or  to 
the  public,  or  both.  If,  however,  a  company  fails  to  perform  this  plain 
duty  and  to  exact  sufficient  returns  to  keep  the  investment  unimpaired 
whether  this  is  the  result  of  unwarranted  dividends  upon  over  issues  of 
securities,  or  of  omission  to  exact  proper  prices  for  the  output,  the  fault 
is  its  own.  When,  therefore,  a  public  regulation  of  its  prices  comes  under 
question,  the  true  value  of  the  property  then  employed  for  the  purpose 
of  earning  a  return  cannot  be  enhanced  by  a  consideration  of  the  errors 
in  management  which  have  been  committed  in  the  past. 

This  statement  is  seen  to  be  based  on  the  proposition  that  for 
every  dollar  by  which  the  property  has  depreciated,  the  company 
is  entitled  to  earn  a  dollar  above  interest  and  profits.  When  this 
is  done  each  item  is  repaid  as  it  is  retired  and  existing  depreciation 
is  made  good  each  year.  If  it  should  not  be  done,  in  the  course 
of  time  replacements  would  have  to  be  made  out  of  entirely  new 
capital  and  that  would  be  an  economic  sin  against  the  next  gener- 
ation. 

This  is  a  statement  of  general  principle  evidently  intended  as 
broadly  applicable  —  since  there  are  no  references  to  the  effect 
of  peculiar  conditions  disclosed  by  the  evidence  in  this  case.  So 
it  must  have  been  well  considered  before  given  form  and  stated 
without  exceptions.  It  is  hard  to  find  grounds  therein  for  ex- 
pecting its  reversal  except  for  those  cases  where  the  company  has 
been  constrained  by  local  government  or  regulating  commission 
to  make  rates  that  did  not  fully  provide  "for  the  replacement  of 
its  property  out  of  earnings."  Requiring  a  company  to  base 
rates  on  depreciated  value  of  property  in  such  cases  would  seem 
to  constitute  confiscation.  The  same  unfortunate  result  would 
be  attained  if  the  regulating  authority  had  applied  and  continued 
to  use  the  sinking-fund  annuity  in  determining  rates  together  with 
depreciated  value  of  property.  The  sinking  fund  is  not  free  capital ; 
it  brings  th&  company  no  dividends  by  its  investment  and  the 
concern  gets  no  return  on  part  of  its  investment  where  the  equiva- 
lent of  full  value  is  not  retained  in  the  rate  basis. 

If  rates  have  been  based  on  full  value  and  retirance  has  been 
secured  by  sinking-fund  annuities,  the  regulating  authorities  could 
follow  two  courses.  First,  they  could  continue  to  risk  using  the 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       115 

sinking-fund  annuity  for  retirance  and  full  value  of  property  on 
which  to  figure  return;  or  they  could  follow  the  Knoxville  dictum 
and  use  depreciated  value  provided  retirance  was  made  fully  equal 
to  computed  annual  depreciation  henceforth;  the  accumulated 
sinking  fund  properly  handled  would  equal  the  depreciation  up  to 
that  time  and  would  then  become  free  capital. 

The  last  sentence  quoted  from  the  opinion  lays  stress  on  the 
errors  of  management  which  cause  or  permit  insufficient  rates. 
It  is  not  to  be  assumed  that  the  same  interdiction  applies  to  the 
many  cases  where  the  business  could  not  have  struggled  along  in 
its  earlier  stages  had  the  charges  been  large  enough  to  satisfy 
this  demand  —  customers  would  have  been  driven  away  instead 
of  being  encouraged  to  increase  to  the  point  when  the  same  rates 
yielded  all  the  proper  sums  without  being  burdensome.  Error 
and  incompetency,  not  mere  force  of  circumstances,  are  to  be 
penalized,  if  a  strict  sense  of  equity  is  to  be  preserved  —  and  that 
surely  was  what  the  court  sought.  Therefore,  the  inclusion  of 
deficits  between  the  actual  returns  and  what  would  be  proper  to 
cover  depreciation  may  be  retained  in  development  expense  or 
"going  value." 

Computing  Annual  Depreciation  and  Retirance.  —  Depreci- 
ation computations  depend  first  on  past  experience  as  to  future 
expectation  of  life.  With  some  utilities  wear-deterioration, 
natural  delapidation;  or  antiquation  may  fix  the  probable  time 
when  various  parts  of  plant  will  have  to  be  retired  from  service, 
as  already  noted.  Once  the  term  is  fixed,  and  the  apportionment 
made  as  quantity  or  demand  charges,  how  shall  the  amount  be 
distributed  as  to  years?  How  close  may  the  annual  retirance  be 
made  to  follow  the  annual  increment  of  depreciation?  Some  of 
the  schemes  followed  are  outlined  below  in  answer  to  these  queries. 

Maintenance  Plan.  —  The  oldest  and  the  simplest  attempt  to 
saddle  renewals  on  customers  was  by  charging  them  for  all  the 
repairs  and  renewals  of  the  year.  This  had  the  unfortunate 
effect  in  some  cases  of  placing  an  extreme  burden  of  retirance  on 
some  years  and  practically  none  on  others,  with  the  result  that 
rates  were  too  far  below  true  cost  at  the  start  and  the  company 
was  in  financial  straits  at  the  end.  This  was  apt  to  be  the  situ- 
ation particularly  in  those  utilities  where  the  property  items  were 
long  lived  —  like  water  and  gas  works.  It  has  worked  out  best 
in  the  case  of  utilities  whose  plant  was  composed  of  a  multitude 


116  PUBLIC  UTILITY  RATES 

of  parts  of  short  life  —  like  telephone  systems  and  some  railroads, 
though  the  latter  have  to  resort  to  "expedients"  when  expensive 
long-lived  fixtures  like  stations  and  bridges  give  way. 

It  is  hard  to  distinguish  between  upkeep  of  old  property  and  new 
extensions,  so  that  one  result  of  the  direct-replacement  or  main- 
tenance scheme  in  some  cases  has  beeri  to  make  additions  out  of 
earnings.  A  certain  amount  of  such  manipulation  often  may  be 
sanctioned,  but  too  much  of  it  hides  the  true  cost  of  service  and 
may  cause  a  company's  stockholders  to  earn  unduly  on  property 
which  the  customers  and  not  the  investors  paid  for. 

The  actual  value  of  an  established  property  in  equilibrium 
administered  after  this  scheme  is  only  from  60  to  85%  of  the 
investment  (plus  appreciation).  This  15  to  40%  depreciation  is 
lost  to  the  company,  according  to  the  Knoxville  decision,  through 
neglect  to  collect.  The  plan  gives  no  adequate  knowledge  of 
the  annual  depreciation  and  it  is  assuming  less  and  less  importance 
each  year. 

Appraisal  Plan.  —  A  second  plan  that  has  been  tried  is  the  sub- 
traction from  earnings  of  sums  which  an  examination  of  the  prop- 
erty shows  to  represent  the  loss  in  value.  This  is  better  in  theory 
than  in  practice  —  due  to  certain  human  limitations  and  to  one 
inherent  defect.  Changes  due  to  depreciation  are  not  well  dis- 
closed by  annual  examinations  because  of  but  slight  changes  in 
appearance  from  year  to  year  —  differences  which  however  be- 
come more  noticeable  as  the  period  between  appraisals  lengthens. 
Then,  the  mind  of  the  appraiser  may  change  from  year  to  year, 
or,  more  likely  perhaps,  the  appraisers  themselves  may  change 
and  bring  a  radical  change  in  standards  of  comparison. 

This  sort  of  a  depreciation  levy  must  be  dangerous,  in  view  of 
the  Knoxville  decision.  It  gives  weight  largely  to  superficial 
evidence  of  past  deterioration,  while  the  worth  of  the  property, 
from  the  point  of  view  of  the  integrity  of  investment,  has  been 
further  impaired  by  the  accrued  liability  for  renewals  on  account 
of  probable  obsoletion.  It  will  not  do  to  say  that  the  "depreci- 
ation" allowances  secured  from  rates  relate  absolutely  to  the 
past  decay  —  to  what  can  be  seen  to  have  definitely  happened. 
Retirements  of  obsolete  equipment  must  come  in  the  future,  it  is 
true,  but  when  they  do  come  they  must  be  paid  out  of  past  earn- 
ings or  future  economies,  to  accord  with  the  Knoxville  decision. 
This  means  that  the  utility  has  an  increasing  liability  each  year 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       117 

for  obsolescence  and  that  each  year  something  must  be  secured  to 
compensate  for  the  annual  increment. 

Straight-line  Scheme.  —  The  most  obvious  way  of  distribut- 
ing the  burden  of  retirement  over  the  life  of  service  is  to  divide  the 
cost  by  the  years  of  life  and  set  out  the  resultant  quotient  from 
each  year's  earnings.  Such  money  can  be  held  by  the  utility 
owner  as  he  sees  fit  against  the  day  of  replacement.  If  the  ac- 
cumulated reserves  and  the  time  passed  be  plotted  as  a  mathe- 
matical graph  or  "curve,"  the  form  will  be  a  straight  line  of 
course  —  hence  the  engineers'  term  "straight-line  scheme" 
which  has  mystified  most  laymen  and  some  attorneys. 

One  difficulty  is  that  in  spite  of  a  superficial  plausibility  in  the 
straight-line  plan,  there  is  no  logical  reason  to  expect  that  simple 
depreciation  necessarily  accumulates  in  direct  proportion  to  the 
age  —  that  the  value  of  a  machine  is  half  gone  at  half  its  expected 
life.  Indeed  when  property  having  a  very  long  life,  like  cast-iron 
pipe  which  is  good  for  60  to  100  years,  is  considered  the  value 
is  seen  to  be  not  inversely  proportional  to  the  age.  In  fact  the 
pipe  at  30  years  is  worth  80%  instead  of  50%  —  because  of  the 
importance  of  interest  element  in  affecting  worth.  Moreover, 
during  the  early  period  of  operation,  the  load  is  apt  to  be  light 
and  the  unit  costs  high  anyway  so  that  the  development  of  the 
business  would  be  hampered  by  large  retirance  factors  in  rates. 

However,  on  the  other  hand,  if  the  utility  property  largely  con- 
sists of  a  great  number  of  short-lived  items,  as  is  the  case  with 
most  telephone  systems,  railroads,  and  some  electric  railways, 
then  the  straight-line  scheme  has  an  attractive  simplicity  and 
the  discrepancy  between  actual  depreciation  and  retirance  secured 
cannot  be  appreciable.  Straight-line  schemes  here  have  an  ad- 
vantage over  the  actual-renewal  or  maintenance  basis  for  utilities 
whose  properties  may  not  show  equilibrium  between  depreciation 
and  maintenance. 

Sinking-fund  Plan.  —  It  is  desirable  that  annual  retirances 
should  closely  approximate  annual  depreciations.  The  most 
popular  scheme  of  computing  the  annual  depreciation  of  a  property 
item  is  to  consider  that  it  follows  the  growth  of  a  sinking  fund 
sufficient  to  extinguish  the  cost  at  the  end  of  the  probable  life. 
Now,  as  is  well  known,  a  sinking  fund  grows  through  the  payment 
to  it  of  an  annuity  or  annual  contribution  and  by  the  investment 
of  the  sums  so  contributed,  so  that  there  is  an  annual  sum  for 


118  PUBLIC  UTILITY  RATES 

interest  which  is  retained  in  the  fund.  The  annuity  or  annual 
contribution  is  made  of  such  size  that  it  will,  if  invested  at  com- 
pound interest,  with  the  interest  accumulations,  equal  the  cost 
of  the  property  item  after  a  given  number  of  years,  representing 
the  life  of  such  item.  Therefore,  in  order  that  the  annual  retirances 
which  must  come  from  the  rate  payers  may  closely  approximate 
the  annual  depreciation  increments,  they  must  in  each  year  equal 
the  annual  contribution  to  a  sinking  fund  plus  the  accumulations  of 
interest,  and  this  furnishes  the  basis  for  the  equal-annual-pay- 
ment plan,  subsequently  described.  The  general  practice,  how- 
ever, is  to  include  directly  in  the  sums  to  be  earned  as  retirances 
only  the  annuity  or  annual  contribution  to  the  sinking  fund,  which 
is  a  much  smaller  sum,  and  if  the  discrepancy  were  not  provided 
for  in  the  earnings  somehow,  a  great  injustice  would  be  done  the 
owner,  for  it  is  only  through  the  rates  that  the  entire  depreciation 
can  be  made  good  and  the  investment  kept  unimpaired.  This 
discrepancy  between  annuity  and  required  retirance,  in  practice, 
is  compensated  for  by  allowing  the  owner  of  the  property  to 
include  in  rate-basis  worth  the  undepreciated  value  of  the  prop- 
erty —  even  though  it  may  have  lost  considerable  value  through 
depreciation.  Part  of  what  should  have  been  accounted  for  as 
direct  retirance  is  recovered  in  increased  interest. 

It  is  a  serious  defect  of  the  sinking-fund-annuity  plan,  in  view 
of  the  principles  underlying  the  Knoxville  decision,  that  it  is 
necessary  in  order  to  preserve  equity  to  use  the  undepreciated 
value  of  property  contrary  to  the  requirements  of  law  as  interpreted 
in  this  famous  case.  There  is  danger  that  the  law,  as  it  stands 
interpreted  so  far,  may  prevail  against  equity  for  the  older  utilities 
working. with  sinking-fund  annuities  as  pseudo-retirances.  The 
injustice  will  come  to  those  concerns  which  in  good  faith  have 
used  sinking-fund  annuities  to  provide  retirance.  The  situation 
is  brighter  for  those  who  have  been  constrained  by  government  to 
form  sinking  funds,  for  they  may  charge  that  confiscation  has 
begun,  unless  they  employ  full  value.  The  remedy  for  these 
dangers  seems  to  be  the  abandonment  of  the  sinking-fund  annuity 
as  the  measure  of  retirance  and  the  substitution  of  the  larger  sum 
equivalent  to  a  sinking-fund  annuity  plus  the  interest  accumula- 
tions of  the  year. 

A  good  part  of  the  popularity  of  the  sinking-fund-annuity  plan 
has  possibly  been  due  to  a  vague  feeling  that  somehow  the  depre- 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       119 

elation  was  being  cared  for  adequately  at  much  less  expense  than 
by  any  other  scheme.  Such  a  view  savors  a  bit  of  the  old  "some- 
thing-for-nothing"  ideas  that  are  so  persistent  and  so  often  attrac- 
tive. A  good  example  is  furnished  by  the  following  remark  of  one 
of  the  best  known  utility  commissioners  in  the  country: 

Without  going  into  details,  it  can  be  said  that  the  sinking-fund  method 
employs  a  more  efficient  use  of  the  reserve  [than  the  straight-line  plan]. 
Because  of  such  use,  the  amount  the  consumers  will  have  to  contribute  to 
cover  depreciation  is  less  than  under  the  straight-line  method. 

Where  the  amounts  so  provided  have  been  used  for  necessary  and 
proper  renewals  and  for  the  accumulation  of  a  reserve  for  covering  the 
accrued  depreciation  of  the  property  still  in  use,  no  reduction  from  the 
cost  new,  because  of  depreciation,  should  be  made  in  determining  the  fair 
value  for  rate  making  and  certain  other  purposes. 

Obviously,  what  is  not  paid  in  as  retirance  is  covered  by  in- 
terest on  nonexistent  plant  value  —  a  palpable  trick  in  words  or 
bookkeeping. 

This  plan  carries  with  it,  in  some  cases  and  always  in  some 
people's  minds,  the  implication  of  a  distinct  reserve  fund  invested 
in  outside  securities.  However,  in  the  great  majority  of  cases 
seemingly,  the  allowances  so  secured  are  put  into  the  property  in 
place  of  money  that  would  have  to  be  raised  from  outside  sources. 
Investing  reserve  funds  inside  the  business  complicates  the  scrutiny 
of  accounts  and  operating  results,  but  it  tends  to  reduce  slightly 
the  cost  of  service  or  product  —  something  which  is  desirable. 

No  matter  whether  the  retirance  funds  are  invested  inside  or 
outside  of  the  business,  for  the  scrutiny  of  rate  facts  it  seems 
essential  to  remember  that  reserves  made  up  of  sinking-fund 
annuities  must  earn  for  their  own  aggrandizement  in  order  to 
provide  full  amortization.  Therefore  they  are  not  to  be  regarded 
as  free  capital  in  studying  the  business,  no  matter  how  the  owner 
chooses  to  handle  them  in  the  interests  of  daily  operation. 

It  needs  to  be  emphasized  perhaps  that  in  the  great  majority 
of  concerns,  up  to  the  present,  the  sinking-fund  method  of  figur- 
ing retirance  in  rates  has  been  merely  an  attempted  process  of 
arriving  at  a  fair  and  proper  burden  on  the  customers.  Unless 
the  degree  of  regulation  is  severe,  there  is  not  apt  to  be  dictation 
as  to  how  the  retirance  moneys  shall  be  invested.  The  public 
is  protected  when  the  utility  uses  these  repaid  moneys  in  well 
defined  and  safe  ways. 


120  PUBLIC  UTILITY  RATES 

Modified  Straight-line  Schemes.  —  The  complication  and 
confusion  of  thought  introduced  into  the  scrutiny  of  utility  busi- 
ness by  the  "sinking-fund"  plan  has  led  some  to  go  back  to  the 
scheme  of  directly  apportioning  the  cost  of  an  item  over  the  ex- 
pected years  of  life,  but  not  uniformly  as  in  the  regular  straight- 
line  scheme.  Instead  they  have  variously  decreased  it  in  the 
early  years  and  increased  it  toward  the  end  of  the  expected  life 
period  of  the  piece  of  equipment  in  question.  Usually  this  has 
been  done  arbitrarily  and  empirically. 

Annual  Cost  of  Service  and  Actual  Depreciation.  —  It  is  not 
mere  age,  nor  yet  service  ability  drop  that  discloses  annual  depre- 
ciation; nor  is  it  general  appearance.  But  it  is  reasonable  to 
expect  that  there  should  be  some  fairly  logical  basis  of  computing 
the  probable  annual  real  decrement.  If  the  annual  depreciation 
be  assumed  to  start  high,  then  the  early  retirance  must  be  heavy 
and  in  the  later  years  light;  the  fair  value  (rate  basis,  Knoxville- 
Case  standard)  of  an  item  would  be  low  in  later  years  and  the 
fixed  charges  (interest  and  retirance)  would  greatly  fluctuate.  If 
now  operating  costs  have  not  risen  (excluding  the  effect  of  rise  in 
price  of  labor  and  materials)  and  the  service  is  well  maintained, 
steady  fixed  charges  may  be  regarded  as  a  normal  economic 
phenomenon.  Fluctuation  of  service  cost  would  be  due  to  fluctu- 
ating cost  of  labor  and  supplies.  That  is  to  say,  given  a  probable 
life  of  equipment  where  the  fixed  charges  are  large  hi  proportion 
to  the  operating  costs  and  where  the  deterioration  or  inadequacy 
will  not  seriously  change  the  operating  costs  until  very  near  the 
expected  tune  of  retirement,  the  real  annual  depreciation  is  such 
that  the  fixed  charges  (interest  and  retirance)  continue  steady 
year  after  year. 

For  example,  assume  that  a  water  pipe  costing  new  $1000  and 
having  an  expected  life  of  50  years  had  been  in  use  25  years.  The 
interest  at  6%  and  retirance  would  be  for  the  first  and  25th  year, 
by  the  straight-line  plan: 

1st  year  interest $60-  00 

1st  year  retirance 20 . 00 


1st  year  fixed  charges $80 . 00 

25th  year  value 500.00 

"       "     interest 30.00 

"       "     retirance 20.00 

"      "    fixed  charges $50.00 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       121 

If  it  were  assumed  that  there  was  no  depreciation  up  to  25 
years,  as  the  pipe  was  giving  good  service,  the  comparison  would 
be: 

1st  year  interest $60 . 00 

1st  year  retirance 0.00 

1st  year  fixed  charges $60.00 

25th  year  value $1000.00 

"       "     interest 60.00 

"       "     retirance 40.00 

"      "     fixed  charges "              $100.00 

Following  sinking-fund  computations  the  same  pipe  would 
show  these  figures : 

1st  year  interest $60.00 

1st  year  retirance 3 .44 


1st  year  fixed  charges $63 . 44 

25th  year  retirance  aggregate $188 . 97 

"       "     value 811 ,03 

"       "     interest 48.66 

"      "     retirance  (on  $811.03) 14.78 

"       "     fixed  charges $63.44 

It  is  obvious  that  the  $80  and  $50  given  by  the  straight-line 
plan  for  fixed  charges  during  the  first  and  25th  year,  and  the  $60 
and  $100  given  by  the  inspection  plan  are  extremely  abnormal 
and  uncommercial,  while  the  $63.44  for  both  years  by  sinking- 
fund  computations  is  economically  and  reasonably  desirable. 

Where  the  operating  expenses  go  up  materially  due  to  the 
deterioration  of  the  equipment,  then  the  depreciation  increases 
more  rapidly  than  otherwise  and  may  approach  the  straight-line 
basis,  as  shown  later. 

"  Equal-Annual-Payment "  Scheme  for  Computing  Retirance. 
—  This  plan  is  really  a  convex-curve  modification  of  the  straight- 
line  scheme  and  is,  with  its  developments,  the  most  ingenious  and 
the  only  scientific  modification  which  the  author  has  seen.  It 
was  developed  by  Frederic  P.  Stearns  for  his  engineering  practice 
and  the  simpler  elements  were  discussed  in  1914,  in  the  progress 
report  of  the  special  Committee  of  the  American  Society  of  Civil 
Engineers  on  Valuation  for  Utility  Rate-making.  The  annual 
allowances  were  not  arranged  arbitrarily  but  were  fixed  in  such  a 
way  that  the  aggregate  of  dominant  factors  in  rates  would  tend 
to  be  constant  year  after  year. 


122  PUBLIC  UTILITY  RATES 

The  calculations  leading  to  equal  annual  fixed  charges  in  the 
preceding  example  were  spoken  of  as  "sinking-fund  computations." 
They  follow  the 'standard  sinking-fund  tables  as  to  the  amount  of 
depreciation  in  the  property  at  the  beginning  of  the  25th  year, 
but  the  amount  of  retirance  adopted  for  the  25th  year  is  not  the 
sinking-fund  annuity  but  the  increase  in  the  amount  of  the  sinking 
fund  during  the  year,  consisting  of  annuity  plus  interest  accumula- 
tions. When  the  sinking-fund  computations  are  used  in  this  way, 
the  equal-annual-payment  scheme  of  compensating  for  depre- 
ciation is  evolved.  As  each  year's  retirance  by  the  equal-annual- 
payment  plan  is  equal  to  the  annuity  under  the  sinking-fund 
plan,  plus  the  amount  of  the  interest  accumulations  of  the  sinking- 
fund  during  the  year,  the  larger  sum  thus  represented  by  the 
equal-annual-payment  plan  is  the  sum  which  the  company  is  en- 
titled to  earn  as  an  offset  to  the  depreciation  of  its  property  items 
in  order  to  keep  its  investment  intact. 

It  may  seem  at  first  sight  that  the  equal-annual-payment  plan, 
providing  as  it  does  a  larger  retirance  for  each  year  after  the  first 
than  the  annuity  of  a  sinking  fund,  would  be  opposed  to  the 
interests  of  the  rate  payers  and  would  give  larger  earnings  to  the 
company.  This,  however,  is  not  the  case  when  both  systems  are 
applied  in  an  equitable  manner.  The  company  should  be  per- 
mitted to  earn  a  retirance  equivalent  to  the  amount  of  deprecia- 
tion, and  if  the  retirance  is  figured  to  be  the  inadequate  sum 
represented  by  the  sinking-fund  annuity  alone  there  must  be  a 
further  allowance  from  the  rate  payers  to  cover  the  interest 
accumulations  of  a  sinking  fund  during  the  year.  As  shown 
already,  it  commonly  masquerades  with  interest  on  full  undepreci- 
ated value  of  plant.  The  assumption,  contrary  to  the  facts,  that 
the  property  has  not  depreciated  in  value,  is  wholly  for  the  pur- 
pose of  making  up  for  the  inadequacy  of  the  retirance  when  it  is 
assumed  to  be  equal  to  the  sinking-fund  annuity. 

By  the  equal-annual-payment  plan  substantially  the  same  results 
can  be  secured  as  with  the  sinking-fund  annuity  and  full-value 
scheme  —  but  quite  in  harmony  with  the  Knoxville  decision. 
The  equal-annual-payment  plan  will  be  seen  to  be  the  simplest 
case  of  what  the  author  has  called  for  convenience  a  group  of 
"convex-curve"  plans  all  closely  related  to  it  and  all  springing 
out  of  complicated  practical  conditions  discussed  in  a  later  para- 
graph on  the  effect  on  depreciation  of  rising  cost  of  operation. 


DEPRECIATION  AS  IT   AFFECTS  UTILITY  RATES       123 

Retirance,  figured  by  this  plan,  is  declared  not  to  be  in  any  sense  a 
reserve.  It  is  an  immediate  and  direct  compensation  for  property 
value  lost  by  deterioration  and  by  liability  incurred  for  retirement  of 
equipment.  The  retirance  is  immediately  available  for  canceling 
obligations  or,  what  is  equivalent,  for  reinvestment  in  replace- 
ments, additions,  improvements,  etc.  When  retirances  are  so 
reinvested  they  enter  rate-basis  worth  on  a  par  with  extensions 
paid  for  by  fresh  accessions  of  capital. 

Interest  is  allowed  only  on  the  diminished  worth  (unreturned 
investment)  of  each  item;  where  the  retirance  sums  are  rein- 
vested those  new  property  items  so  purchased  earn  like  all  the 
other  items  and  retirance  is  collected  each  year  for  them  also. 
Obviously,  the  annual  interest  on  unrepaid  investment  in  each 
item  of  property  goes  down  steadily  but  the  retirance  aggregate 
goes  up  correspondingly.  The  annual  payments  for  retirance  and 
interest  on  continuing  investment  then  can  have  a  constant  annual 
aggregate  when  the  rate  of  interest  and  rate  for  retirance  compu- 
tations are  the  same. 

Objections  to  the  Equal- Annual-Payment  Plan.  —  The  Stearns 
plan  has  been  criticised  for  making  the  retirance  (and  the  com- 
puted annual  depreciation  increment)  change  with  the  selection 
of  an  interest  rate  at  which  the  hypothetical  sinking  fund  is 
compounded,  whereas  the  actual  depreciation  obviously  is  in- 
dependent of  the  rate  for  the  calculations.  The  answer  to  this 
objection  is  that  there  is  but  one  definite  rate  for  compounding 
the  hypothetical  fund  to  satisfy  the  economic  criterion  already 
applied  —  equal  annual  fixed  charges.  That  proper  interest  rate 
is  the  same  as  the  allowed  rate  of  return  on  the  property  —  so 
long  as  there  is  no  change  in  operating  cost  or  capacity  through 
depreciation.  The  effect  of  such  changes  is  traced  in  a  later  para- 
graph. 

This  plan  would  seem  to  allow  great  flexibility  of  management 
in  public  utilities,  but  it  has  not  been  universally  accepted.  In 
the  first  place,  many  railroad  men  have  shown  themselves  hostile 
to  anything  which  suggested  "basing  rates  on  cost  of  service"  — 
having  in  mind,  however,  not  "rates"  but  "tariffs"  and  forgetting 
that  a  "rate"  for  a  railroad  at  present  means  a  sort  of  unit  gross 
revenue,  a  weighted  average  of  all  the  detailed  "tariffs"  —  which 
admittedly  are  affected  by  many  things  besides  cost  of  service, 
as  noted  under  special  problems  of  specific  utilities. 


124  PUBLIC  UTILITY  RATES 

Other  utility  officials  have  been  hostile  to  this  plan  because  it 
followed  the  dictum  of  the  Knoxville  Water  case  (that  the  rate- 
basis  worth  must  be  a  depreciated  value  of  property  used  and 
useful,  irrespective  of  former  investment).  But  the  method  in- 
cludes in  "property,"  the  reinvestment  of  retirance,  development 
expenses,  early  deficits,  etc.,  so  that  the  objections  were  not  so 
much  against  a  principle  as  a  policy.  It  has  been  argued  by 
some  objectors  that  to  admit  that  a  depreciated  value  could  ever 
equitably  be  used  (in  the  absence  of  official  misconduct)  in  figur- 
ing rate  basis,  would  result  in  a  clamor  for  use  of  depreciated  value 
irrespective  of  the  treatment  of  retirance. 

Depreciation  Under  Increasing  Operating  Costs.  —  Where  the 
cost  of  operation  goes  up  materially  because  of  the  deterioration 
of  the  equipment,  then  of  course  the  equalization  of  annual  fixed 
charges  alone  is  not  a  proper  criterion.  Rather  it  would  appear 
to  be  proper  to  hold  that  the  sum  of  fixed  charges  and  of  opera- 
tion-cost increase  should  remain  constant.  Under  these  conditions 
the  real  depreciation  may  more  nearly  approach  the  unmodified 
straight-line  apportionment.  It  may  disclose  a  depreciation  more 
rapid  than  that  given  by  the  straight-line  scheme  for  the  length 
of  life  first  assumed  to  hold. 

For  instance,  take  the  case  of  a  small  water-works  pump. 
Suppose  that  it  was  a  new  departure  in  design  and  was  expected 
to  have  a  life  of  ten  years;  suppose  that  in  service  it  was  found 
that  slip  and  increased  friction  increased  the  cost  of  operation 
$4  each  year.  (This  is  a  hypothetical  condition  purposely  taken 
to  illustrate  the  depreciation  action  involved.)  Assume  that  the 
scrap  value  only  equals  the  cost  of  removal. 

To  find  the  actual  depreciation  under  these  conditions  the  capital- 
ized excess  cost  of  operation  is  deducted  from  the  figures  for  nom- 
inal value  and  considered  as  repaid  to  the  investor.  The  remaining 
value  is  repaid  during  the  ten  years  according  to  equal-annual- 
payment  plan;  the  depreciation  (and  the  retirance)  is  the  sum  of 
each  year's  capitalized  excess  cost  and  the  other  annual  factor. 
The  computations  are  shown  in  the  accompanying  tables,  the 
simple  plan  for  unchanged  operating  costs  being  presented 
first. 

When  the  output  has  decreased  with  age,  the  unit  cost  has  in- 
creased. The  multiplier  is  the  reciprocal  of  the  decreased  capac- 
ity —  if  the  output  is  only  0.9  of  the  initial,  then  the  unit  cost  is 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       125 


I.  ANNUAL  RETIRANCE  AND  FIXED  CHARGES  BY  THE  EQUAL-ANNUAL- 
PAYMENT  PLAN 


End  of 
Year 

Diminished 
Value 

Interest 

Annual  Retir- 
ance  (or  Depreci- 
ation Increment) 

Aggregate 
Retirance  (or 
Depreciation) 

Interest 
plus 
Retirance 

o 

$1000.00 

1 

924.13 

$60.00 

$75.87 

$75.87 

$135.87 

2 

843.71 

55.45 

80.42 

156.29 

135.87 

3 

758.46 

50.62 

85.25 

241.54 

135.87 

4 

668.10 

45.51 

90.36 

331.90 

135.87 

5 

572.32 

40.09 

95.78 

427.68 

135.87 

6 

470.79 

34.34 

101.53 

529.21 

135.87 

7 

363.18 

28.26 

107.61 

636.82 

135.87 

8 

249.10 

21.79 

114.08 

750.90 

135.87 

9 

128.18 

14.95 

120.92 

871.82 

135.87 

10 

7.69 

128.18 

1000.00 

135.87 

II.  ANNUAL  RETIRANCE  AND  FIXED  CHARGES  FOR  EQUAL  FIXED-AND- 
EXCESS  COSTS:  RISING  OPERATING  EXPENSE  OR  DECREASING  CAPACITY 


Total 

Sink- 

Retirance 

End  of 
Year 

Excess 
Operat- 
ing Cost 

Capital- 
ized 
Excess 
Repaid 

ing 
Fund 
Incre- 
ment 

Depreci- 
ation or 
Retirance 

Retirance 
or  Depre- 
ciation 

Dimin- 
ished 
Value 

Interest 
on 
Value 

Interest 
and 
Excess 
Cost 

0 

$1000.00 

1 

$4.00 

$66.67 

$25.29 

$91.96 

$91.96 

908.04 

$60.00 

$155.96 

2 

8.00 

133.33 

26.81 

93.48 

185.44 

814.56 

54.48 

155.96 

3 

12.00 

200.00 

28.42 

95.09 

280.53 

719.47 

48.87 

155.96 

4 

16.00 

266.67 

30.12 

96.79 

377.32 

622.68 

43.17 

155.96 

5 

20.00 

333.33 

31.93 

98.60 

475.92 

524.08 

37.36 

155.96 

6 

24.00 

400.00 

33.85 

100.52 

576.44 

423.56 

31.44 

155.96 

7 

28.00 

466.67 

35.88 

102.55 

678.99 

321.01 

25.41 

155.96 

8 

32.00 

533.33 

38.03 

104.70 

783.69 

216.31 

19.26 

155.96 

9 

36.00 

600.00 

40.31 

106.98 

890.67 

109.33 

12.98 

155.96 

10 

40.00 

666.67 

42.73 

109.40 

1000.07 

-0.07 

6.56 

155.96 

III.   ANNUAL  RETIRANCE  AND  FIXED  CHARGES  FOR  EQUAL  FIXED-AND- 

EXCESS  COSTS:  INCREASING  OPERATING  EXPENSE  WITH 

DECREASING  CAPACITY 


End  of 
Year 

Excess 
Cost 

Total 
Capitalized 
Excess 
Repaid 

Annual 
Depreci- 
ation (or 
Retirance) 

Aggregate 
Retirance 

Diminished 
Value 

Interest 
on  Value 

Retirance 
Interest 
and  Excess 
Cost 

0 

$1000.00 

1 
2 
3 

4 
5 
6 

7 
8 
9 

$8.00 

16.00 
24.00 
32.00 
40.00 
48.00 
56.00 
64.00 
72  00 

$133.34 
266.66 
400.00 
533.34 
666.66 
800.00 
933.34 
1066.66 
1200.00 

$133.34 
133.34 
133.34 
133.34 
133.34 
133.34 
133.34 
66.66 

$133.34 
266.66 
400.00 
533.34 
666.66 
800.00 
933.34 
1000.00 

866.66 
733.34 
600.00 
466.66 
333.34 
200.00 
66.66 
0.00 

$60.00 
52.00 
44.00 
36.00 
28.00 
20.00 
12.00 
4.00 
0  00 

$20i.34 
201.34 
201.34 
201.34 
201.34 
201.34 
201.34 
134.68 

10 

80.00 

1333.34 

126 


PUBLIC  UTILITY  RATES 


1.11  times  the  initial  value.  The  total  cost  of  the  original  out- 
put, if  the  deficiency  was  made  up  by  other  machines  of  similar 
type,  would  be  increased  by  use  of  the  same  multiplier;  that  is, 
an  excess  cost  results  which  can  be  studied  exactly  as  was  the 
extra  cost  of  operation.  If  the  annual  operating  expense  of  the 
hypothetical  pump  already  noted  was  say  $800,  a  gradual  drop  of 
capacity,  without  increase  of  gross  operating  expense,  to  95.3% 
in  these  ten  years  would  mean  an  increase  in  excess  cost  of  5% 
or  $40.  Table  II  therefore  applies  to  this  case. 

Should  the  two  actions  be  combined  then  the  result  would 
be  as  in  Table  III.  The  only  change  over  Table  II  is  that  caused 
by  doubling  the  excess  cost,  and  capitalized  excess  cost.  This 
amounts  to  the  original  cost  of  the  $1000  item  by  the  8th  year 
so  that  there'  is  no  need  of  attempting  to  retire  the  item  by  in- 
troducing any  equal-annual-payment  plan  factor. 


£     3    4    5     6 
Years 


789 


VALUE  AND  RETIRANCE  CURVES  FROM 
TABLES  I,  II  AND  III 

In  theory  the  excess  costs  may  rise  more  rapidly  than  shown 
but  attempts  to  find  how  they  go  probably  are  no  closer  estimates 
than  assuming  a  uniform  increase. 

The  Supreme  Court  on  Retirance  Methods.  —  There  are  no 
high  court  decisions  dealing  specifically  on  the  questions  of  sink- 
ing funds  actually  maintained  to  offset  depreciation  and  cover 
retirements.  The  nearest  approach  probably  is  the  Knoxville 
water  case,  noted  before.  This  opinion  clearly  points  out  that  a 
company  should  earn  enough  to  cover  the  depreciation  of  all  its 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       127 

property,  and  pay  the  running  expenses,  fixed  charges,  etc.,  but 
it  holds  that  depreciation  must  be  deducted  from  cost  in  arriv- 
ing at  the  rate  basis  —  "fair  value."  Beyond  that  there  seem- 
ingly are  no  specific  and  inflexible  demands  in  the  Knoxville  case 
opinion  completely  in  favor  either  of  setting  up  true  sinking  funds, 
or  of  putting  the  annuities  into  productive  extensions  of  the  plant, 
or  of  returning  to  the  investor  his  annual  impairment  of  invest- 
ment for  him  to  put  back  into  the  business  as  fresh  capital  if  he 
chooses.  Yet  the  Knoxville-decision  has  been  greatly  feared  as 
a  breeder  of  injustice  because  it  demands  a  return  only  on  depre- 
ciated value  whereas  with  the  true  sinking  funds  set  up,  as  re- 
quired by  some  state  commissions,  the  equivalent  of  a  return  on 
undepreciated  value  is  needed. 

It  is  reasonable  to  expect  that  the  court  will  recognize  the  un- 
just constraint  and  provide  the  remedy  —  admitting  the  equiva- 
lent of  undepreciated  value  of  plant  in  rate-basis  worth.  The 
reasoning  which  the  court  might  be  expected  to  follow  is  not 
difficult  to  trace: 

The  retirance  comes  from  rates  and  only  from  rates.  If  the  annual  re- 
tirances  have  been  held  down  by  state  regulations  to  less  than  the  annual 
depreciations,  some  equivalent  of  the  difference  must  have  been  made  avail- 
able to  the  company  or  confiscation  has  resulted.  Numerically  this  has  been 
accomplished  by  the  bookkeeping  fiction  of  using  undepreciated  value  in 
the  rate  basis.  It  is  incidental  that  the  retirances  have  been  ordered  tied  up 
in  a  reserve  fund  —  for  the  earnings  of  that  fund,  which  equal  the  return 
on  the  false  element  of  value,  prevent  confiscation  by  providing  return  on 
enforced  reservation  of  capital.  The  final  results  have  been  equitable  and 
the  methods  of  computation  may  be  neglected  as  to  the  past.  For  the  future, 
however,  retirance  should  not  masquerade  as  interest  on  a  false  value  and  the 
rate-basis  worth  should  not  be  increased  by  any  non-existent  elements. 

Lower  Courts  on  Sinking-fund  Retirance.  —  There  are  various 
lower-court  decisions  favoring  and  disapproving  the  sinking-fund- 
annuity  method  of  figuring  retirance  elements  in  rates.  But 
none  of  the  lower  courts  have  objected  to  the  sinking-fund- 
annuity  plan  on  the  vital  grounds  already  noted;  their  opposition 
seems  to  be  due  to  a  misapprehension  of  the  mathematical  basis  of 
computation.  Possibly  this  is  because  some  courts  have  been 
led  by  the  quotation  of  average  percentages  for  composite  de- 
preciation on  the  whole  property  to  think  that  the  sinking-fund 
method  necessitated  tying  up  the  whole  of  the  concern's  renewal 
funds  until  the  average  life  of  the  assembled  equipment  was 


128  PUBLIC  UTILITY  RATES 

reached.  That,  of  course,  is  not  the  intention  by  any  scheme  of 
proportioning  the  retirance  and  the  quotation  of  average  lives 
and  aggregate  percentages  is  but  a  convenient  form  for  some 
discussions  and  comparisons.  In  every  case  the  aggregates  can 
be  resolved  into  their  components,  when  it  is  seen  that  the  funds 
for  retirement  of  each  and  every  item  is  complete  at  the  end  of 
its  estimated  life.  Reinvestment  of  a  completed  retirement  item 
does  not  affect  the  growth  of  other  and  incomplete  items.  Re- 
placement of  an  item  can  be  paid  for  at  the  expiration  of  its  life 
out  of  the  fund  —  up  to  the  stated  cost-less-salvage. 

Typical  of  the  adverse  court  decisions  noted  above  two  may 
be  cited.  The  first  is  the  New  York  case,  People  ex  rel.  Man- 
hattan Ry.  Co.  v.  Woodbury  (203  N.  Y.  239;  Oct.  1911).  The 
opinion  of  Judge  Haight  runs: 

"The  Special  Term  in  this  case,  however,  adopted  a  plan  of  amor- 
tization upon  which  an  annual  sum  was  authorized  to  be  set  apart  as 
a  sinking  fund,  which,  by  compounding  the  interest  thereon  for  a  period 
equal  to  the  life  of  the  structure,  tracks,  engines,  machinery  and  rolling 
stock,  would  at  the  end  of  that  period  create  a  fund  sufficient  to  replace 
the  property.  The  difficulty  with  such  holding  is  that  railroad  cor- 
porations do  not  reconstruct  their  railroads  and  rolling  stock  in  that 
way.  In  order  to  afford  proper  protection  to  the  public  they  are  re- 
quired to  maintain  a  high  state  of  efficiency  both  in  roadbed  and  rolling 
stock.  The  relator's  railroad  has  been  in  existence  already  for  about 
thirty  years  and  some  portion  of  its  property  has  already  suffered  from 
decay  and  use  to  such  an  extent  that  portions  thereof  have  to  be  recon- 
structed and  made  new  each  year.  Old  ties  have  to  be  removed  and  re- 
placed with  new  ones;  old  rails  that  have  become  worn  and  battered 
have  to  be  removed  and  their  places  supplied  with  new  rails  and  so  the 
work  of  reconstruction  progresses  from  year  to  year.  It  is  not  the  waiting 
forty  or  sixty  years  to  reconstruct,  during  which  time  the  amount  set 
apart  as  a  sinking  fund  may  be  doubled  many  times  over  by  compound- 
ing the  interest,  but  it  is  the  annual  expenditure  for  reconstruction  which 
is  to  be  paid  for  at  the  time  that  the  construction  is  made.  To  illustrate: 
Suppose  the  average  life  of  the  tangible  property  of  a  railroad,  outside  of 
the  land  itself,  to  be  sixty  years  and  the  cost  of  reconstruction  to  be  sixty 
million  dollars,  it  would  follow  that  one  million  dollars  would  have  to  be 
used  each  year  in  reconstruction,  and  that  amount  would  have  to  be  an- 
nually used  for  that  purpose;  but  under  the  plan  adopted  in  this  case, 
instead  of  deducting  from  the  gross  earnings  the  amount  necessarily 
expended  for  that  purpose,  a  small  fraction  of  that  sum,  viz.,  $4200, 
only  is  allowed  to  be  deducted,  a  sum  which,  with  the  interest  com- 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       129 

pounded  for  the  next  sixty  years,  would  amount  to  a  million  dollars. 
Under  such  a  plan  the  company  would  be  practically  prohibited  from 
annually  constructing  a  portion  of  its  road  and  thus  prevented  from 
keeping  it  in  that  state  of  efficiency  which  the  public  demands.  Of 
course  the  necessities  of  reconstruction  vary  from  year  to  year;  some 
years  it  may  be '"greater  than  others,  but  the  assessors  each  year  can  easily 
ascertain  the  sum  required  for  that  purpose.  I  think,  therefore,  that 
we  should  adhere  to  the  rule  sanctioned  in  the  Jamaica  case,  and  that  a 
gross  sum  should  be  deducted  annually  for  the  purposes  of  reconstruction." 

Two  things  are  seen  by  reading  this  with  the  preceding  discus- 
sions of  "depreciation"  and  "retirance"  in  mind.  The  first  is 
that  the  court  did  not  grasp  the  possibility  of  the  component 
items  in  the  aggregate  of  the  sinking-fund  allowances  maturing  at 
different  periods  and  being  thereupon  available  for  making  a 
replacement.  The  second  point  is  a  palpable  arithmetical  slip; 
the  cost  of  reconstruction  is  stated  as  sixty  million  dollars,  yet 
the  aggregate  retirance  is  stated  as  one  million.  If  the  $4200  ap- 
plies to  only  this  one  million,  then  the  allowance  for  full  retirance 
which  should  have  been  made  is  $252,000.  Computing  the  annual 
contribution  at  4%  compound  interest  for  60  years  and  sixty 
million  dollars  gives  $252,000  also.  It  may  be  said  that  even  this 
is  only  a  quarter  that  needed  for  annual  renewals;  the  reply  must 
be  that  the  needed  replacements  cannot  reach  that  million  aver- 
age or  equilibrium  figure  for  many  years  and  that  in  that  time 
there  has  been  a  heavy  fund  accumulation  which,  being  distributed 
over  the  remaining  years  of  the  60  and  added  to  the  annual  amounts 
will  give  the  million  and  over  needed  thereafter.  This  must  neces- 
sarily result  if  the  aggregate  renewance  figure  is  made  up,  as  it 
should  be  when  this  plan  is  followed,  of  component  factors  properly 
figured  on  the  several  property  items  and  their  life  as  experienced 
under  similar  conditions. 

Similar  misunderstanding  of  the  underlying  mathematical 
basis  is  seen  in  the  so-called  Louisville  Telephone  Case  decision  of 
Judge  TSvans  (Cumberland  Tel.  and  Tel.  Co.  v.  City  of  Louisville, 
187  Fed.  Rep.  637;  April,  1911),  often  quoted  as  adverse  to  sink- 
ing funds  : 

Of  course  our  estimate  could  not  be  based  upon  the  proposition  that 
the  per  centum  set  apart  to  cover  depreciation  would  be  deposited  in 
bank  or  loaned  out  from  year  to  year  so  as  to  accumulate  and  be  on 
hand  at  the  end  of  14  years,  and  to  be  then  used  to  construct  an  entirely 
new  plant,  and  so  on  from  period  to  period.  In  such  a  case  the  public 


130  PUBLIC  UTILITY  RATES 

would  not  only  have  a  service  that  would  progressively  grow  wotee  until 
its  operations  ceased  altogether,  but  it  would  thereafter  get  no  service 
at  all  until  a  new  plant  replacing  the  old  could  be  completed  and  put  into 
operation.  The  question  rather  has  been;  What  does  experience  show 
to  be  the  proper  average  per  cent  of  annual  earnings  which  the  company 
should  expend  hi  order  to  insure  that  its  plant  at  the  end  of  14  years  will 
be  as  good  as  it  now  is,  and  in  the  meantime  render  to  the  public  that 
good  service  which  its  duty  to  the  public  requires? 

Choice  of  Retirance  Plans.  —  Some  engineers  rest  their  con- 
fidence in  one  scheme  of  getting  retirance  out  of  rates,  and  others 
in  another  —  each  contending  that  his  is  better  than  any  other. 
Each  may  be  justified  in  the  light  of  his  own  experience,  and  as 
that  changes  so  may  his  views  on  this  point.  It  serves  no  good 
end  to  be  dogmatic  in  opinions  on  any  one  plan,  for  under  special 
conditions  some  shine  to  better  advantage  than  others.  Often 
the  differences  to  a  large  extent  indeed  are  matters  of  definition. 
It  can  be  said,  however,  that  with  careful  study  some  plan  or  other 
can  be  selected  which  will  simply  meet  peculiar  needs,  remain 
within  the  spirit  of  the  highest  court  decisions  and  protect  all 
continuing  investments. 

This  may  result  in  use  of  two  or  more  plans  in  combination; 
however,  the  one  should  not  require  undiminished  value  and  the 
other  depreciated  value.  For  instance  in  a  telephone  plant,  there 
is  a  vast  number  of  property  items  each  comparatively  small 
and  of  comparatively  short  life  —  from  obsoletion.  The  history 
of  the  art  is  so  filled  with  rapid  changes  that  it  is  difficult  to  make 
more  than  the  roughest  estimate  in  the  hope  that  it  will  cover 
the  renewals  as  a  whole.  But  it  is  seen  that  there  has  been  a 
steady  growth  of  the  more  permanent  plant,  like  buildings  and 
underground  conduits,  on  which  one  can  approximately  fix  the 
life  and  therefore  provide  reasonable  retirance  by  the  straight-line 
or  convex-curve  plan  as  may  be  required.  Then  when  these 
items  have  lived  their  useful  life,  the  owners  will  have  their  equiva- 
lent in  hand.  But  for  the  multitude  of  instruments,  switchboards 
and  various  pieces  of  more  or  less  small  equipment  it  may  be 
necessary  to  set  aside  out  of  earnings  the  actual  annual  cost  of 
replacements.  That  alone  will  not  do  in  fixing  rates,  however, 
and  it  may  become  necessary  to  estimate  the  most  probable  aver- 
age as  shown  by  the  cost  of  such  replacements  in  the  past.  The 
two  factors  then  may  combine  into  an  aggregate  annual  sum 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       131 

which  may  enter  rates.  Since  the  equilibrium  value  of  the  tele- 
phone system  (excluding  buildings,  conduits,  and  other  long-lived 
items)  will  be  found  10  to  20%  under  investment  the  difference 
should  be  repaid  somehow  and  this  is  easily  done  by  spreading  the 
amount  over  several  years  in  a  suspense  account. 

The  inaccuracy,  the  inadequacy  and  the  expense  of  the  "valu- 
ation" plan  of  providing  retirance  seem  to  be  valid  arguments 
against  the  universal  employment  of  this  plan.  The  valuation 
study  has  some  usefulness,  however,  as  already  noted,  in  being 
applied  at  intervals  of  five  or  ten  years  to  correct  any  false  trend 
taken  by  the  other  more  easily  applied  annual  schemes  based  on 
estimates  of  probable  life. 

The  Famous  Hen  Argument.  —  One  argument,  advanced 
against  use  of  depreciated  value  of  physical  plant  in  rate  bases, 
which  has  captivated  many  hearers  is  the  now  well  known  hen 
story  of  counsel  for  the  Consolidated  Gas  Co.,  in  the  famous 
80c.  rate  case  (Willcox  v.  Consolidated  Gas;  212  U.  S.  19).  His 
argument  in  brief  was  that  toward  the  end  of  the  hen's  career 
while  she  was  still  laying  vigorously  but  apt  to  stop,  the  price 
of  the  eggs  should  decline  with  the  value  of  the  hen  if  the  depreci- 
ated-value basis  were  followed,  until  perfectly  good  eggs  would  be 
sold  at  a  ridiculous  price. 

That  illustration,  as  generally  used,  is  extremely  fallacious.  A 
moment's  careful  thought  shows  that  the  cost  of  the  eggs  should  be 
unchanged  —  with  a  steady  market  price  of  chicken  feed.  The 
factors  entering  in  (besides  daily  food)  are  (1)  interest  on  depreci- 
ated value  of  hen,  and  (2)  annual  retirance;  as  (1)  goes  down  (2) 
correspondingly  goes  up,  if  the  problem  be  looked  at  from  the 
standpoint  of  the  straight-line  or  equal-annual-payment  plan, 
and  the  aggregate  repayment  for  the  years  past  ha*s  been  avail- 
able for  the  owner  to  put  into  other  hens  or  equivalent  earning 
property  (since  he  undoubtedly  had  more  than  one  hen).  If  the 
sinking-fund  annuity  plan  is  followed,  equity  is  established  only 
by  admitting  the  fictitious  undepreciated  value  of  the  hen  to  make 
up  the  required  retirance.  This  hen  argument  is  hesitantly  re- 
viewed here,  but  these  few  words  have  been  added  because  the 
hen  story  has  found  too  ready  acceptance  and  has  a  certain  popular 
appeal. 

Other  Depreciation-computation  Plans.  —  The  schemes  dis- 
cussed already  are  not  the  only  ones  that  have  been  proposed  for 


132  PUBLIC  UTILITY  RATES 

finding  the  retirances  to  be  secured  out  of  rates.  Some  of  the 
others,  however,  do  not  satisfy  the  economic  criterion  of  stable 
fixed  and  excess  costs.  One  of  their  chief  faults  is  that  the  early- 
year  charges  are  excessive. 

One  of  these  plans  is  the  "reducing-balance"  method,  by  which 
a  definite  percentage  of  the  diminishing  value  is  considered  as 
each  year's  contribution.  Its  illogical  status  is  obvious. 

Another  is  the  "simple-annuity"  scheme  by  which  an  equal 
annual  sum  is  found  which  will  include  a  given  percentage  inter- 
est on  the  remaining  investment  and  reduce  the  investment  to 
zero  at  the  close  of  a  given  period.  This  is  in  contrast  with  the 
equal-annual-payment  plan  by  which  retirance  is  made  to  include 
the  interest  of  an  accumulated  hypothetical  fund  and,  incidentally, 
therefore  on  the  lost  value. 

There  is  finally  to  be  noted  the  "unit-cost"  method  which  aims 
to  secure  the  same  results  as  attained  by  the  "convex-curve" 
schemes  developed  from  the  equal-annual-payment  plan  —  equal 
annual  costs  of  "service.  The  total  cost  of  operation,  the  amount 
of  repairs,  the  sinking-fund  annuity,  the  output  old  and  new,  etc., 
enter  a  complicated  but  logically  developed  formula:* 

Q  +  P  +  F  +  iV  _g  +  p+f+iv 

~Y-          ~r 

y     (Q  +  P  +  XV  +  iV      q  +  p 
x.+  i\  Y  y 

V  =  cost  of  new  substitute  machine;  v  =  diminished  value  of 
old  machine;  F  =  sinking-fund  annuity  to  amortize  V  in  N  years; 
/  =  sinking-fund  annuity  to  amortize  v  in  n  years;  Q  =  average 
annual  operating  expense  of  new  substitute  machine,  exclud- 
ing repairs ;  <f  =  average  annual  operating  expense  of  old  machine, 
excluding  repairs;  P  =  annuity  to  meet  repairs  on  new  plant; 
p  =  annuity  to  meet  repairs  of  new  plant;  i  =  interest  rate;  U  = 
average  unit  cost  of  output  from  new  machine  in  N  years;  u  = 
average  unit  cost  of  output  from  old  machine  in  n  years  left; 
Y  =  average  number  of  output  units  per  year  from  new  machine 
working  for  N  years;  y  =  unit  output  from  old  machine  for  n 
years  left;  X  =  sinking-fund  annuity  to  accumulate  $1  in  N 
years;  x  =  sinking-fund  annuity  to  accumulate  $1  in  n  years. 

*  Detailed  by  E.  A.  Sailers,  "Theory  of  Depreciation,"  Ronald  Press, 
N.  Y.,  1915. 


DEPRECIATION  AS  IT  AFFECTS  UTILITY  RATES       133 

The  plan  accomplishes  no  more  than  the  convex-curve  scheme 
and  has  one  great  weakness  which  that  scheme  has  not  —  depreci- 
ation and  retirance  are  assumed  to  be  equal  to  sinking  fund  an- 
nuities, and  not  to  annuities  plus  interest  accretions. 

The  "  unit-cost "  scheme  was  developed  by  equating  a  supposed 
unit  cost  of  output  of  both  old  and  new  substitute  machine.  But 
the  cost  of  production  for  both  old  and  new  machine  is  under- 
stated, since  retirance  is  taken  as  the  sinking-fund  annuity  and  not 
annuity  plus  interest  accretion.  The  underestimate  amounts  to 
only  10%  in  the  case  of  the  old  machine  but  is  nearly  50%  in  the 
case  of  the  new,  with  the  result  that  the  computed  value  of  the 
old  unit  is  too  low. 


CHAPTER  IX 

MISCELLANEOUS  PROBLEMS  INDIRECTLY  RELATED 
TO   RATE-MAKING 

Problems  Old  and  New.  —  Some  of  the  problems  that  con- 
front public  utilities  (including  both  privately  and  municipally 
owned  works)  seem  to  change  from  decade  to  decade.  In  the 
past,  the  more  pressing  problems  have  been  technical  and  more 
or  less  peculiar  to  each  utility.  Gas  works  once  faced  potential 
calamity  until  central-station  electricity  supply  found  its  field 
and  the  two  divided  their  services  according  to  the  intrinsic  ad- 
vantages of  each.  Water-supply  men  sought,  among  the  various 
methods  of  improving  available  but  polluted  supplies,  some  uni- 
versal scheme  until  they  found  the  conditions  under  which  each 
plan  should  be  favored.  Light  railways  had  to  change  from  animal 
to  cable  traction  and  again  to  electric.  Trunk  railroads  found 
lines  and  equipment  of  insufficient  capacity. 

Each  utility  has  similar  new  problems  today  and  they  have,  in 
addition  and  in  common,  a  new  one  of  paramount  importance  — 
public  regulation.  It  has  been  but  a  few  years  since  utilities  ran 
as  best  they  could,  and  with  no  complete  public  oversight;  they 
charged  what  they  could  get  and  figured  their  profits  (or  their 
losses)  after,  instead  of  before,  a  given  period  of  operation.  Even 
municipal  utility  departments  seldom  rendered  an  accounting  of 
their  stewardship  that  was  more  than  a  hopeless  jumble  of  arbi- 
trarily chosen  figures.  Now  utilities  are  constrained  to  take  the 
public  into  confidence  and  are  warned  that  they  are  to  meet  the 
public's  desires  for  service  so  far  as  the  customers  are  willing  to 
pay  for  it  —  and  so  far  as  a  fair  profit  can  be  earned  for  the  in- 
vestors (in  the  case  of  privately  owned  utilities).  This  broad 
problem  of  regulation  brings  a  complication  of  intricate  questions, 
only  a  few  of  which  have  been  discussed  in  the  preceding  pages 
and  then  as  they  directly  affect  rates.  There  are  others  of  less 
direct  influence  which  may  be  lightly  touched  upon,  however. 
These  problems  are  commonly  spoken  of  as  "economic"  but  they 
are  to  a  larger  extent  political  —  using  that  term  in  a  broader  and 

134 


INDIRECTLY  RELATED   PROBLEMS  135 

less  popular  meaning  than  usual,  to  signify  a  close  relation  to 
matters  of  local  government. 

The  Future  of  Regulation.  —  Rate-making  is  necessarily  most 
intimately  connected  with  the  whole  scheme  of  public  supervision 
and  regulation  but  the  plan  of  supervision  itself  is  a  problem. 

Utility  regulation  is  not  a  new  departure  in  the  American 
political  situation,  although  the  tremendous  development  of  ten 
years  somewhat  obscures  the  earlier  steps.  Indeed  in  the  early 
common  law  descended  to  us  there  have  been  various  restrictions 
on  some  industrial  efforts  closely  related  to  the  public  life,  though 
these  impositions  were  designed  solely  to  protect  the  people  from 
real  or  fancied  oppressions.  For  example,  various  attempts  to 
lay  hold  of  American  transportation  facilities  can  be  discerned 
through  the  past.  Indeed,  it  was  the  pressing  need  of  facilitating 
commerce  between  the  colonies  that  made  possible  the  amalga- 
mation of  the  states  of  the  American  Union  and  the  adoption  of  the 
federal  constitution.  Political  and  economic  differences  of  opin- 
ion prevented  fusion  until  the  needed  freedom  of  a  fettered  trade 
over-rode  all  obstacles.  Therefore  the  utility  regulation  now 
beginning  to  flower  is  deeper  seated  than  many  persons  are  ready 
to  admit  and  it  does  not  appear  like  a  transitory  fad  likely  to  be 
cast  aside  soon  for  some  other  political  bauble. 

At  the  same  time,  however,  it  is  common  political  experience 
that  such  movements  have  pendulum-like  swings  and  some  abate- 
ment of  popularity  must  be  foreseen.  Such  a  temporary  reversion 
may  be  expected  when  the  tide  seems  to  be  running  toward  gov- 
ernmental operation,  or  when  increased  demands  are  evident  for 
"home"  rule  of  our  cities,  or  when  the  cost  of  detailed  supervision 
becomes  more  oppressive  than  the  burden  of  unsupervised  monop- 
oly. The  net  effect  of  all  these  political  and  economic  tenden- 
cies is  probably  to  be  a  state  of  more  or  less  equilibrium  where 
benefits  generally  balance  the  burdens  and  where  departure 
either  toward  or  away  from  deeper  regulation  brings  greater 
burdens  of  one  sort  or  another  than  benefits  of  any  kind. 

Avenues  of  Regulation.  —  Whether  general  regulation  is  by 
state  or  municipal  body,  the  powers  of  supervision  are  limited  to 
the  powers  of  the  legislature  and  the  latter  always  has  the  para- 
mount authority,  fixed  by  state  and  federal  constitutions  and 
restricted  by  valid  contract  rights  which  may  have  come  into 
existence  and  may  continue  even  perhaps  with  public  injury. 


136  PUBLIC  UTILITY  RATES 

Thus  there  are  six  possible  avenues  of  regulation  (1)  direct 
congressional,  (2)  by  federal  commission,  both  of  these  applying 
to  interstate  matters  and  to  intrastate  only  in  the  absence  of 
state  legislation  and  effort,  (3)  by  direct  state  legislation,  (4)  by 
state  commission,  (5)  by  municipal-council  supervision,  (6)  by 
local  commission.  Regulation  by  direct  congressional  act,  state 
legislation,  or  even  municipal  ordinance,  cannot  hope  ever  to 
cover  more  than  most  general  instructions,  and  any  details  of 
application  necessitate  long  continued  industry  beyond  the  power 
of  the  legislators  and  necessarily  are  thrown  upon  organized 
employees.  A  commission  seems  to  be  required  whatever  the 
plan  followed. 

The  existing  popularity  of  the  state  board  at  present  seems  to 
spring  from  certain  real  advantages  such  as  (1)  regulation  at 
lower  relative  cost  the  greater  the  scale,  (2)  probable  wider  out- 
look and  experience  of  state  over  city  commissions  and  (3)  ab- 
sence of  local  prejudices- 

Common  Powers  of  a  Commission.  —  It  is  a  common  prin- 
ciple of  American  jurisprudence  that  a  legislature  cannot  dele- 
gate broad  powers,  yet  public-utility  commissions  are  ordinarily 
spoken  of  as  enjoying  delegated  powers.  Where  is  the  fallacy? 
The  courts  have  held  that  the  legislature  is  not  delegating  its 
powers  when  it  decrees,  for  instance,  that  the  rates  shall  "yield  a 
fair  return  on  fair  value"  and  lays  upon  a  subordinate  body  the 
work  of  filling  out  the  details  which  depend  on  investigation  and 
computation. 

Commissions  usually  cannot  enforce  contracts  —  a  function  of 
existing  courts ;  they  have  to  call  on  the  courts  to  enforce  their  own 
orders.  Findings  and  orders  of  the  commissions  are  reviewed  by 
proper  courts  though  presumption  of  facts  established  by  a  com- 
mission is  recognized.  These  bodies  have  limited  judicial  and 
executive  functions  but  such  are  subordinate  and  auxiliary  to  the 
main  functions  of  a  legislative  subc'ommission. 

Public   Regard   of   Franchises.  —  A  "  franchise  "  *  has  been 

*  The  term  "franchise"  in  this  work,  and  in  this  section  particularly,  is 
used  in  a  broad  sense  as  applied  to  utility  operations  and  not  in  the  restricted 
way  some  legal  minds  employ  it.  Thus  some  would  specifically  limit  the  term 
(see  paper  by  W.  M.  Wherry,  on  "Franchise  Values,"  before  the  American 
Electric  Railway  Association,  October,  1913)  to  (1)  general  rights  to  be  cor- 
porations and  (2)  such  special  rights  to  occupy  public  territory  as  are  legal 
private  property  —  "  incorporeal  hereditaments, "  vendible  and  transferable, 


INDIRECTLY  RELATED  PROBLEMS         137 

variously  called  the  delegation  of  municipal  functions  to  private 
individuals  or  corporations  for  the  furtherance  of  public  welfare, 
a  license  to  do  business  and,  again,  a  mere  inducement  to  invest 
money  and  undertake  service.  The  confusion  arising  from  many 
definitions  of  a  franchise  and  many  attitudes  toward  franchise 
holders  cannot  be  removed  unless  in  the  course  of  time,  all  such 
enterprises  should  be  placed  on  approximately  equal  footings,  and 
all  have  then  come  under  a  wise  public  control. 

Franchise  Value  in  Rate  Basis.  —  The  older  franchises  are 
largely  of  the  type  responding  to  the  tests  of  value  as  private 
property.  They  have,  perhaps  unwittingly,  been  given  a  value 
then  which  cannot  be  taken  away  without  "due  process  of  law" 
and  are  apt  to  enter  the  rate  basis.  The  grantors  in  very  many 
cases  desired  to  hold  out,  to  the  existing  generation,  chances  for 
unusual  profits  but  it  seems  improbable  that  they  contemplated 
holding  up  all  the  future  generations  of  customers  for  payment  of 
the  same  profits  to  heirs  or  assigns  of  the  promoters. 

An  important  case  of  this  sort  is  now  pending  before  the  U.  S. 
Supreme  Court  —  the  Passaic  (N.  J.)  90-cent  gas  rates.  This 
has  already  been  noted  (page  65)  in  regard  to  the  decision  of 
the  highest  New  Jersey  State  Court,  in  concurring  with  which 
one  justice  pointed  out  that  franchises  were  property  to  be  pro- 
tected by  the  government,  but  were  not  property  used  and  useful 
in  the  public  service  since  their  value  depended  on  the  service  and 
rates.  The  franchise  value  sprung  out  of  a  contract  to  "furnish 
services  at  reasonable  rates"  and  since  the  "stream  could  not  rise 
higher  than  its  source,"  the  reasonable  rates  could  not  depend 
on  the  value  of  the  contract. 

Franchises  can  be  drawn  which  raise  no  such  disturbing  questions 
but  which  still  are  equally  fair  to  the  utility  and  advantageous  to 
the  public.  They  may  deny  perpetual  rights  but  allow  maximum 
development  by  making  an  indeterminate  life  with  compensation 
for  seizure.  They  may  deny  the  chance  for  large  speculative 

bestowing  unimpairable  enjoyment  or  earning  capacity  on  physical  posses- 
sions. Having  thus  all  the  attributes  of  private  property  such  a  franchise 
is  held  to  have  a  value  not  related  to  its  cost  but  determined  by  its  market- 
ability, by  its  ability  to  increase  profits,  and  by  all  unearned  increments 
attached  to  itself  and  to  the  accompanying  property  and  business.  It  has 
already  been  noted  that  franchises  have  been  held  in  court  to  have  a  value 
springing  out  of  service  and  hence  not  to  be  property  "used  and  useful"  in 
the  service.  See  page  65. 


138  PUBLIC   UTILITY   RATES 

rewards  but  they  can  insure  moderate  profits.  The  commercial 
success  of  companies  under  these  measures  explains  why  some 
concerns  have  relinquished  franchises  of  some  monetary  or  market 
value  in  order  to  secure  added  privileges  necessary  for  the  further 
growth  of  their  service. 

Other  Regards  of  Franchises.  —  The  franchise,  to  a  certain 
extent,  may  be  regarded  as  an  appointment  to  office  with  the 
corporation  as  a  "public  servant"  —  and  like  other  public  officials 
subjected  to  public  scrutiny  and  criticism  of  motives,  ability  and 
results.  Those  who  would  push  the  agent  analogy  to  an  extreme, 
however,  are  apt  to  fail  to  give  adequate  consideration  to  certain 
characteristics  of  the  utility  corporation  which  prevent  its  com- 
pletely being  so  treated.  For  instance,  (1)  money  has  been 
invested  to  give  to  the  public  a  service  corresponding  to  the 
privilege  conferred  on  the  corporation;  the  concern,  therefore,  has 
certain  property  rights  of  managing  the  public  utility  as  a  business 
and  these  are  not  to  be  tightly  invaded.  (2)  It  is  entitled  to 
secure  high-priced  expert  employees  if  they  promote  efficiency 
and  adequate  service.  (3)  Finally,  the  investors  are  entitled  to 
compensation,  above  mere  rates  of  interest,  for  risk  and  atten- 
tion, while  for  notable  skill,  zeal  and  broad  public  policy,  it  may 
be  sometimes  advisable  to  allow  other  added  profit. 

If  the  franchise  is  purchased,  perhaps  at  open  sale,  the  agent 
or  public-servant  characterization  fails  still  further  and  there  is 
better  ground  for  holding  the  franchise  as  a  license  to  do  business 
—  especially  if  the  franchise  be  not  completely  monopolistic.  A 
franchise  may  properly  be  regarded  as  in  the  nature  of  a  license 
to  do  business  and  not  at  all  a  badge  of  office  when  a  general  need 
for  the  particular  product  or  service  has  not  been  felt.  Under 
such  a  pioneer  condition,  the  people,  not  being  dependent  upon 
the  company  for  comfort,  convenience  or  reasonable  cost  of  living, 
endure  no  hardship  through  irregularity  or  cessation  of  a  service 
that  is  regarded  as  a  luxury.  The  rates  may  be  fixed  in  a  general 
way  by  the  ordinance,  otherwise  any  charges  may  be  valid  which 
the  company  can  impose  and  still  get  business.  If  such  a  license- 
franchise  confers  a  monopoly,  then  it  may  be  regarded  as  a 
privilege  given  to  induce  the  recipient  to  develop  the  city  and  to 
give  him  some  notable  reward  for  early  efforts  —  a  cheap  grant 
serving  the  same  end  as  special  town  bonds,  tax  rebates, 
etc.,  which  have  often  been  made  for  private  business,  par- 


INDIRECTLY  RELATED  PROBLEMS         139 

ticularly  railroad  projects,  in  the  hope  of  eventual  gain  to  the 
public. 

Naturally,  when  the  private  service  company  develops  into  a 
true  public  utility  and  becomes  a  necessary  part  of  community 
life,  the  public  regard  in  which  the  franchise  is  held  may  change 
and  it  may  become  more  a  mark  of  public  function  assumed  than 
of  mere  license  or  inducement  to  transact  a  desired  business. 
This  changed  attitude  may  be  seen  in  a  few  rate  cases  when,  in 
the  early  days  through  high  rates  or  inferior  service,  the  promoters 
had  already  earned  their  reward  for  pioneering  or  if  failure  to  do 
so  is  traceable  to  lack  of  industry,  skill  or  honesty. 

In  case  the  promoters  have  not  secured  a  justifiable  reward, 
then  rates  may  still  be  fairly  adjusted  to  permit  this  tardy  recom- 
pense even  though  the  regard  of  the  early  franchise  has  changed 
as  noted.  In  recognition  of  the  changed  status  it  may  usually  be 
advisable  to  begin  to  pay  off  some  of  the  accumulated  deficit, 
capitalized  franchise  value,  or  "good  will"  which  may  have  been 
floated  in  the  days  of  private  industry.  •  This  writing  off  and  re- 
tiring of  stocks  or  bonds  (or  any  equivalent  increase  of  assets) 
may  be  regarded  as  a  return  to  those  who  early  risked  much  in 
the  hope  of  reward  or  to  secondary  holders  of  stock  who  pur- 
chased with  these  hopes  in  mind. 

This  leads  up  to  the  proposition  that  even  when  a  license- 
franchise  or  an  inducement-franchise  is  hereafter  given  for  early 
development  of  a  private  business,  if  there  is  any  fair  chance 
that  it  may  develop  to  a  true  public  utility,  we  can  see  that  the 
promoters  should  not  be  able  to  make  the  development  with  an 
absolutely  free  hand  but  should  have  to  bear  in  mind  the  effect 
of  early  policy  on  future  status.  If  this  proposition  be  admitted, 
then  the  contention  still  made  by  some  utility  officials  that  they 
may  seek  the  pioneers'  reward  by  permanent  excessive  capitali- 
zation, or  variously  as  they  see  fit,  is  not  harmonious  with  present 
tendency  of  public  policy  and  corporate  conscience.  But  harsh 
incrimination,  against  those  men  who  have  sought  their  reward 
in  that  fashion  in  the  past,  should  not  be  made  —  for  it  must  be 
admitted  that  the  condemnation  of  such  action  springs  from  a 
growing  public  consciousness,  or  from  an  expanding  horizon,  or 
from  improving  ideals  —  however  one  desires  to  express  it.  In 
earlier  days,  when  promoters  generally  sought  legitimate  rewards 
for  large  risks  of  unknown  undertaking  in  ways  not  now  approved, 


140  PUBLIC  UTILITY   RATES 

it  was  hardly  called  reprehensible  —  or  even  undesirable  —  except 
perhaps  by  the  most  advanced  students  of  public  policy.  Then, 
too,  there  is  now  an  increasing  willingness  to  include  in  capitali- 
zation, the  promoters  proper  rewards  —  which,  however,  are  to  be 
more  openly  paid  as  straight  fees. 

Short-term  Franchises.  —  A  few  years  ago  there  was  an 
evident  desire  hi  some  quarters  to  try  the  short-term  franchise  as 
a  cure  for  the  unfair  entailments  of  unlimited-term  and  unrestricted 
grants.  The  franchises  themselves  may  cost  considerable  sums 
and  require  the  annual  expenditures  of  large  sums  unproductively. 
Before  money  will  be  put  into  such  ventures,  investors  must  be 
assured  either  (1)  that  the  rates  will  allow  the  amortization  of 
the  investment,  above  scrap  value,  during  the  life  of  the  franchise 
or  (2)  that  the  percentage  return  will  be  large  enough  to  cover 
the  risk  of  not  being  able  to  sell  the  business  at  a  fair  price  to  some 
successor,  when  the  franchise  expires. 

Short-term  franchises  would  seem  to  discourage  the  most 
efficient  and  permanent  installation  for  the  widest  geographical 
distribution  of  service  or  product  and  to  encourage  a  rather 
temporary  sort  of  organization  with  loose  business  methods.  All 
such  results,  of  course,  are  detrimental  to  adequate  service  and 
low  rates.  The  public,  in  adding  to  the  cost  of  franchises  in  this 
way,  must  then  be  willing  to  bear  proportionately  increased  rates 
or  inferior  service  —  one  or  both  of  which  may  be  necessary  to 
guarantee  a  "reasonable  return"  on  capital. 

Indeterminate  Franchise.  —  A  remedy  for  the  evils  of  both 
short-term  (or  limited-term)  and  unrestricted  franchises  seems 
possible  in  a  development  of  the  indeterminate  franchise,  like  the 
non-expiring  "operating  agreements"  provided  for  in  the  Wis- 
consin public-utilities  law,  coupled  with  wise  supervision  by  a 
proper  public-service  commission.  Under  this  law  public-utility 
concerns  may  surrender  their  old  franchises  for  "operating  agree- 
ments" which  hold  good  during  the  good  behavior,  so  to  speak,  of 
the  concerns.  Provision  is  made  for  continuation  of  service  and 
purchase  of  plant  when  the  company  is  forced  to  transfer  operation, 
so  that  the  liabilities  may  be  discharged.  Some  important  sec- 
tions of  the  Wisconsin  law  follow. 

Section  1797t-3.  The  term  "indeterminate  permit"  as  used  in  this 
Act  shall  mean  and  embrace  every  grant,  directly  or  indirectly  from  the 
State,  to  any  street  railway  company,  or  power,  right  or  privilege  to 


INDIRECTLY  RELATED  PROBLEMS         141 

own,  operate,  manage  or  control  any  street  railway  plant  or  equipment 
or  any  part  thereof  within  this  State,  which  shall  continue  in  force  until 
such  time  as  the  municipality  shall  exercise  its  option  to  purchase  as 
provided  in  this  Act  or  until  it  shall  be  otherwise  terminated  according 
to  law.  Ch.  578,  1907. 

Section  1797t-2.  Every  license,  permit  or  franchise  hereafter  granted 
to  any  street  railway  company  shall  have  the  effect  of  an  indeterminate 
permit  subject  to  the  provisions  of  this  Act,  and  subject  to  the  provision 
that  the  municipality  in  which  the  major  part  of  its  property  is  situated 
may  purchase  the  property  of  such  street  railway  company  actually 
used  and  useful  for  the  convenience  of  the  public  at  any.  time  as  provided 
herein,  paying  therefor  just  compensation  to  be  determined  by  the  com- 
mission and  according  to  the  terms  and  conditions  fixed  by  said  com- 
mission. Any  such  municipality  is  authorized  to  purchase  such  property, 
and  every  such  street  railway  company  is  required  to  sell  such  property 
at  the  compensation  and  according  to  the  terms  and  conditions  determined 
by  the  commission  as  herein  provided.  Ch.  578,  1907. 

Section  1797t-3.  Any  street  railway  company  operating  under  an  ex- 
isting license,  permit  or  franchise  shall,  upon  filing  at  any  tune  prior  to 
the  expiration  of  such  license,  permit  or  franchise,  with  the  clerk  of  the 
municipality  which  granted  such  franchise  and  with  the  commission,  a 
written  declaration  legally  executed  that  it  surrenders  such  license,  permit 
or  franchise,  receive  by  operation  of  law,  in  lieu  thereof,  an  indeterminate 
permit  as  provided  in  this  Act;  and  such  street  railway  company  shall 
hold  such  permit  under  all  the  terms,  conditions  and  limitations  of  this 
Act.  The  filing  of  such  declaration  shall  be  deemed  a  waiver  by  such 
street  railway  company  of  the  right  to  insist  upon  the  fulfillment  of  any 
contract  theretofore  entered  into  relating  to  any  rate,  fare,  charge  or 
service  regulated  by  Sections  1797-1  to  1797-38  of  the  statutes,  as 
amended.  Ch.  578,  1907. 

Section  1797m-74.  (1)  No  li cense,  permit  or  franchise  shall  be  granted 
to  any  person,  copartnership  or  corporation  to  own,  operate,  manage  or 
control  any  plant  or  equipment  for  the  production,  transmission,  delivery 
or  furnishing  of  heat,  light,  water  or  power  in  any  municipality  where 
there  is  in  operation  under  an  indeterminate  permit,  as  provided  in  this 
Act,  a  public  utility  engaged  in  similar  service,  and  no  telephone  exchange 
for  furnishing  local  service  to  subscribers  within  any  village  or  city  shall 
be  installed  in  such  village  or  city  by  any  public  utility,  other  than  those 
already  furnishing  such  telephone  service  therein,  where  there  is  in  oper- 
ation in  such  village  or  city  a  public  utility  engaged  in  similar  service, 
without  first  securing  from  the  commission  a  declaration  after  a  public 
hearing  of  all  parties  interested,  that  public  convenience  and  necessity 
require  such  second  public  utility.  .  .  . 

All  licenses,  permits  and  franchises  to  own,  operate,  manage,  or  control 


142  PUBLIC  UTILITY  RATES 

any  plant  or  equipment  for  the  production,  transmission,  delivery,  or 
furnishing  of  heat,  light,  water,  or  power  in  any  municipality,  heretofore 
granted  or  attempted  to  be  granted  to  any  public  utility  by  or  by  virtue 
of  any  ordinance  pending  or  under  consideration  in  the  municipal  council 
of  any  municipality  at  the  time  of  the  obtaining  of  an  indeterminate 
permit  by  any  other  public  utility  operating  therein,  are  hereby  validated 
and  confirmed  and  shall  not  be  affected  by  the  provisions  of  subsection  1 
of  Section  1797m-74  of  the  statutes.  Ch.  499,  1907;  ch.  546,  1911; 
ch.  14,  1911  (1). 

(2)  Any  existing  permit,  license  or  franchise  which  shall  contain  any 
term  whatsoever  interfering  with  the  existence  of  such  second  public 
utility  is  hereby  amended  in  such  a  manner  as  to  permit  such  municipality 
to  grant  an  indeterminate  permit  for  the  operation  of  such  second  public 
utility  pursuant  to  the  provisions  of  this  Act.    Ch.  499,  1907. 

(3)  No  municipality  shall  hereafter  construct  any  such  plant  or  equip- 
ment where  there  is  in  operation  under  an  indeterminate  permit  as  pro- 
vided in  this  Act,  in  such  municipality  a  public  utility  engaged  in  similar 
service,  without  first  securing  from  the  commission  a  declaration,  after 
a  public  hearing  of  all  parties  interested,  that  public  convenience  and 
necessity  require  such  municipal  public  utility.    But  nothing  in  this 
section  shall  be  construed  as  preventing  a  municipality  acquiring  any 
existing  plant  by  purchase  or  by  condemnation  as  hereinafter  provided. 
Ch.  499,  1907. 

(4)  Nothing  in  this  section  shall  be  construed  so  as  to  prevent  the 
granting  of  an  indeterminate  permit  or  the  construction  of  a  municipal 
plant  where  the  existing  public  utility  is  operating  without  an  inde- 
terminate permit  as  provided  in  this  Act.    Ch.  499,  1907. 

Section  1797m-75.  No  license,  permit  or  franchise  to  own,  operate, 
manage  or  control  any  plant  or  equipment  for  the  production,  trans- 
mission, delivery  or  furnishing  of  heat,  light,  water  or  power  shall  be  here- 
after granted  or  transferred  except  to  a  corporation  duly  organized  under 
the  laws  of  the  State  of  Wisconsin.  Ch.  499,  1907. 

Section  1797m-76.  Every  license,  permit  or  franchise  hereafter 
granted  to  any  public  utility  shall  have  the  effect  of  an  indeterminate 
permit  subject  to  the  provisions  of  this  Act,  and  subject  to  the  provision 
that  the  municipality  in  which  the  major  part  of  its  property  is  situate 
may  purchase  the  property  of  such  public  utility  actually  used  and  useful 
for  the  convenience  of  the  public  at  any  time  as  provided  herein,  paying 
therefor  just  compensation  to  be  determined  by  the  commission  and 
according  to  the  terms  and  conditions  fixed  by  said  commission.  Any 
such  municipality  is  authorized  to  purchase  such  property  and  every  such 
public  utility  is  required  to  sell  such  property  at  the  value  and  according 
to  the  terms  and  conditions  determined  by  the  commission  as  herein 
provided.  Ch.  499,  1907. 


INDIRECTLY  RELATED  PROBLEMS        143 

Section  1797m-77.  Every  license,  permit,  or  franchise  granted  prior  to 
July  11,  1907,  by  the  State  or  by  the  common  council,  the  board  of  alder- 
men, the  board  of  trustees,  the  town  or  village  board,  or  any  other  governing 
body  of  any  town,  village  or  city,  to  any  corporation,  company,  individual, 
association  of  individuals,  their  lessees,  trustees  or  receivers  appointed 
by  any  court  whatsoever,  authorizing  and  empowering  such  grantee 
or  grantees  to  own,  operate,  manage  or  control  any  plant  or  equipment, 
or  any  part  of  a  plant  or  equipment  within  this  State,  for  the  conveyance 
of  telephone  messages,  or  for  the  production,  transmission,  delivery  or 
furnishing  of  heat,  light,  water  or  power,  either  directly  or  indirectly,  to 
or  for  the  public,  is  so  altered  and  amended  as  to  constitute  and  to  be  an 
"indeterminate  permit"  within  the  terms  and  meaning  of  Sections 
1797m-l  to  1797m-108,  inclusive,  of  the  statutes  of  1898,  and  subject  to 
all  the  terms,  provisions,  conditions  and  limitations  of  said  sections 
1797m-l  to  1797m-108,  inclusive,  and  shall  have  the  same  force  and 
effect  as  a  license,  permit,  or  franchise  granted  after  July  11,  1907,  to 
any  public  utility  embraced  in  and  subject  to  the  provisions  of  said 
Sections  1797m-l  to  1797m-108,  inclusive,  except  as  provided  by  Section 
1797m-80.  Ch.  217,  1911  (1). 

No  franchise  heretofore  surrendered  by  any  corporation  of  this  State 
in  the  manner  and  within  the  time  provided  by  Section  1797m-77,  and 
no  indeterminate  permit  based  thereon,  shall  be  declared  invalid  by 
reason  of  any  defect,  irregularity,  or  invalidity  in  such  franchise  what- 
soever, provided  that  such  franchises  shall  not  have  been  obtained  by 
fraud,  bribery,  or  corrupt  practices;  that  when  such  franchise  was  granted 
no  officer  of  the  municipality  granting  the  same  was  directly  or  indi- 
rectly interested  in  such  franchise  or  in  the  corporation  obtaining  same; 
and  that  the  corporation  having  the  same  shall  have  prior  to  the  sur- 
rendering of  said  franchise  in  good  faith  purchased  or  constructed  any 
street  or  interurban  railroad,  water  works,  gas  or  electric  light  plant,  or 
other  public  utility  or  any  part  thereof  by  such  franchise  authorized;  and 
subject  to  the  foregoing  exceptions,  every  such  franchise  and  permit  is 
hereby  legalized  and  confirmed.  Ch.  499, 1907;  ch.  180, 1909;  ch.  596, 1911. 

Section  1797m-78.  Any  public  utility  accepting  or  operating  under 
any  license,  permit  or  franchise  hereafter  granted  shall,  by  acceptance 
of  any  such  indeterminate  permit,  be  deemed  to  have  consented  to 
future  purchase  of  its  property  actually  used  and  useful  for  the  con- 
venience of  the  public  by  the  municipality  in  which  the  major  part  of  it 
is  situate  for  the  compensation  and  under  the  terms  and  conditions  de- 
termined by  the  commission,  and  shall  thereby  be  deemed  to  have  waived 
the  right  of  requiring  the  necessity  of  such  taking  to  be  established  by 
the  verdict  of  a  jury,  and  to  have  waived  all  other  remedies  and  rights 
relative  to  condemnation,  except  such  rights  and  remedies  as  are  provided 
in  this  Act.  Ch.  499,  1907. 


144  PUBLIC  UTILITY  RATES 

The  Interference  of  Public  Utilities.  —  A  tendency  is  seen,  in 
recent  court  decisions,  not  to  demand  an  absolute  freedom  from 
injury  to  the  plant  of  one  public-utility  concern  from  the  oper- 
ation of  another  public-utility  service,  if  such  freedom  from 
injury  would  place  prohibitive  expense  or  great  risk  of  accident 
on  the  concern  complained  of.  Where  two  different  utilities  are 
maintained  in  a  given  territory,  say  an  electric  railway  and  a 
water  supply,  or  an  electric  railway  and  a  gas  supply,  or  an 
electric  railway  and  a  telephone  company,  a  certain  minimum 
burden  of  damage  may  be  caused  by  the  mere  juxtaposition  of 
the  two  service  plants,  and  this  minimum  in  cases  may  not  be 
eliminated  without  such  restriction  on  the  operations  of  one  or 
the  other  utility  as  would  amount  to  excessive  expense  and  pro- 
hibitive rates. 

Following  the  decision  of  the  U.  S.  Circuit  Court  in  the  case  of 
the  Peoria  (111,)  Water  Works  Co.,  against  the  Central  Railway 
Co.*  (to  restrain  the  latter  from  so  operating  its  electric-railway 
system  that  damage  to  the  pipes  of  the  water  company  was  pos- 
sible), then  the  greater  part  of  the  burden  of  preventing  and  limit- 
ing damage  would  seem  to  fall  on  the  concern  last  to  enter  the  field 
(the  "junior  company"  in  legal  parlance)  whether  complainant 
or  defendant.  At  the  same  time,  every  reasonable  cooperation 
to  lessen  the  total  burden  of  damage  is  made  still  encumbent  on 
the  utility  company  first  in  the  field  (the  "senior  company"). 

Similar  reasoning  is  seen  in  the  decision  f  of  the  Illinois  Superior 
Court  in  the  case  of  Postal  Telegraph-Cable  Co.,  Western  Union 
Telegraph  Co.  and  Lake  Shore  &  Michigan  Southern  R.R.  Co.  v. 
Chicago,  Lake  Shore  &  South  Bend  Ry.  Co.,  to  prevent  the  oper- 
ation of  a  6600-volt,  single-phase  railway  line  on  account  of  certain 
electrical  interferences  with  adjacent  telephone  and  telegraph  lines. 

Where  no  negligence,  malice  or  unskillfulness,  on  the  part  of  a 
dependent  public-utility  concern,  can  be  shown  it  would  seem  that 
the  unavoidable  minimum  injury  is,  to  use  the  legal  phrase, 
"damnum  absque  injuria"  -that  is  "damage  without  injury," 
as  in  the  case  of  an  accident  for  which  no  one  is  responsible. 
Neither  utility  can  put  the  other  out  of  business;  the  situation  is 
to  be  considered  from  the  standpoint  of  total  public  benefit,  not 
mere  convenience  of  the  earlier  concern. 

*  Engineering  News,  Nov.  17,  1910. 

f  Noted  in  Engineering  News,  Dec.  8, 1911,  p.  631. 


INDIRECTLY  RELATED  PROBLEMS         145 

Cost  of  Changes  to  Avoid  Interference.  —  Two  rules  have 
.  been  proposed  for  dividing  the  expense  of  changes  made  in  utility 
•plants  to  avoid  interferences,  so  that  the  prior  company  bears 
no  burden  of  expense  for  the  mere  change,  but  is  assessed  for  the 
cost-  of  improvements.*  The  first  rule  is  simple  and  reads  as 
follows : 

Charge  the  second  company  with  the  net  cost  of  the  new 
equipment  not  to  exceed  the  capacity  of  the  old  amd  make  no 
credits  for  recovery  value  of  material  removed. 

The  second  rule  is  more  elaborate  but  possibly  more  generally 
applicable : 

Charge  the  intruding  company  for  all  material,  labor,  super- 
vision, etc.,  for  the  change,  and  credit  it  with  all  material  re- 
covered. Charge  the  intruding  company  an  amount  equal  to 
the  present  worth  of  the  future  recovery  value  of  the  old  plant 
if  no  changes  had  been  made.  (This  will  be  a  credit  if  the  recov- 
ery value  is  a  liability.)  Credit  it  with  an  amount  equal  to  the 
present  worth  of  the  future  recovery  value  of  the  new  plant. 
(This  will  be  a  charge  if  the  recovery  value  is  a  liability.)  When 
the  new  unit  is  of  larger  capacity  than  the  old,  these  rules  apply 
to  amounts  not  exceeding  the  charges  and  credits  for  a  unit  of 
the  same  capacity,  since  that  is  the  extent  of  the  intruder's 
responsibility. 

Improper  Activities.  —  That  conduct  of  certain  utility  corpo- 
rations which  has  been  most  widely  condemned  (except  possibly 
the  evil  of  discrimination)  is  the  exploiting  of  the  public  service  by 
loading  down  the  project  with  huge  speculative  promoters'  profits 
in  the  shape  of  watered  stock.  In  some  cases  there  has  been  a 
direct  and  immediate  extortion  from  the  customers  through  earn- 
ings in  excess  of  reasonable  returns  or  through  high  rates  for  poor 
service.  Investors  have  suffered  from  association  with  manage- 
ments which  have  let  plants  run  down. 

For  rank  overcapitalizations  *  no  adequate  excuse  has  been 
offered,  though  the  offenses  of  years  ago  are  perhaps  mitigated  by 
the  general  lack  of  condemnation  of  such  practices.  Possibly  the 
extortions  have  arisen  largely  from  failure  of  concerns  to  change 
their  policy  when  their  business  was  freed  from  the  risks  of  pioneer 
days  and  strenuous  competition,  and  when  perhaps  they  tried  to 

*  Discussed  at  length  by  H.  H.  Shearer  and  D.  F.  Norton  in  Engineering 
News,  Mar.  23,  and  June  1,  1916. 


146  PUBLIC  UTILITY  RATES 

recoup  too  many  fold  their  earlier  losses.  Perpetuation  of  lax 
managements  may  be  traced  in  the  last  analysis,  perhaps  to  the 
eagerness  of  the  investors  to  secure  high  rates  of  return  without 
scrutinizing  the  conduct  of  promoters  and  managers  who  promised 
much;  the  investors  failed  to  recognize  the  reasons  for  returns 
above  ordinary  interest  and  to  realize  that  attention  is  a  neces- 
sary safeguard. 

Undue  Discrimination.  —  The  improper  activity  most  closely 
related  to  rate  making  is  broadly  covered  by  the  term  "discrimi- 
nation. "  Since  an  utility  serves  all  comers,  the  several  customers 
are  entitled  to  the  same  equitable  treatment.  Lower  rates  to  one 
customer  under  the  same  conditions,  or  any  rebates  to  that  end, 
are  contrary  to  the  spirit  by  which  it  is  agreed  that  a  quasi-public 
corporation  should  be  governed.  When  customers  are  attracted 
by  public  convenience  or  necessity  (rather  than  by  commercial 
advantages)  the  rates  become  more  and  more  based  on  cost  of 
service,  and  less  and  less  on  what  the  traffic  will  bear.  This  view 
would  indicate  that  there  should  be  no  change  of  rate,  no  dis- 
crimination, according  to  the  ultimate  use  of  the  product,  such  as 
still  prevails  in  some  places  where  the  same  gas  is  sold  at  differ- 
ent prices  for  lighting  and  heating.  Special  conditions,  however, 
may  render  this  sort  of  discrimination  equitable  from  a  broad  point 
of  view  sometimes.  For  instance,  electricity  for  heating  may  be 
sold  in  some  places  at  reduced  rates  and  yet  there  may  be  no  dis- 
crimination against  lighting  users  because  of  the  different  hours 
of  use  and  because  of  the  great  benefit  to  all  in  spreading  the  serv- 
ice over  the  greatest  number  of  hours,  and  keeping  the  equip- 
ment busy  day  and  night.  The  benefits  of  such  discrimination 
should  be  open  to  all  comers. 

There  may  fairly  be  different  rates  to  customers  of  the  same  size 
but  under  different  working  conditions.  Thus  a  factory  securing 
electric  power  from  central  stations,  but  only  in  times  of  lightest 
station  load,  is  a  more  profitable  customer  than  one  taking  power 
at  all  times  and  contributing  to  the  peak  load.  There  is  little 
investment  charge  in  the  rates  that  may  be  made  for  real  non- 
peak  load  and  the  rates  may  be  very  low  and  still  not  be  discrim- 
inatory or  in  conflict  with  "  cost  of  service  "  principles.  However, 
in  building  up  a  non-peak  business,  the  public-utility  corporation 
is  only  remotely  performing  a  public  service  and  is  dependent  on 
the  industry  and  business  ability  of  its  officials  or  directors.  It  is 


INDIRECTLY  RELATED  PROBLEMS  147 

incumbent  on  the  corporation  then,  if  ever,  to  charge  all  that  the 
non-peak  customers  will  pay;  it  is  its  legitimate  concern  to  make 
the  rate  for  non-peak  customers  sufficiently  attractive  to  get  the 
business.  The  general  obligation  to  the  public  is  to  furnish  no 
off-peak  power  below  cost,  i.e.,  at  a  loss  which  must  be  repaid  by 
peak-load  customers.  Yet  there  may  be  rare  cases  where  the 
initial  off-peak  business  is  carried  for  a  very  short  time  at  a  small 
loss  more  than  made  up  as  this  sort  of  business  is  increased. 

A  broad  policy  on  the  part  of  any  utility  management  would 
dictate,  in  making  new  rates  for  non-peak  service,  giving  equal 
opportunities  to  all  its  customers  —  or  at  least  not  enabling  one 
to  secure  through  the  service  rates  an  undue  commercial  advantage 
over  another.  For  instance,  if  the  cost  of  off-peak  service  to  one 
customer  is  reduced  to  secure  certain  new  business,  then  the  rates 
for  such  service  to  other  customers  of  the  same  class  should  be 
reduced  to  the  same  level. 

Many  persons  believe  that  in  any  one  case  uniform  rates  to 
customers  of  all  types  should  prevail,  on  the  theory  that  a  public 
utility  must  not  expect  to  make  every  customer  or  every  class  pay 
an  equal  profit.  But,  at  the  present,  as  the  cost  of  service  is 
usually  not  the  same  to  different  classes  of  customers  and  in  effect 
varies  largely  with  amount  of  service  given,  it  seems  like  a  mild 
form  of  discrimination  to  force  the  heavy-service  class  to  furnish 
the  profit  on  a  small-load  class. 

Utilities  in  Politics.  —  Political  domination  and  highway- 
men's methods  of  preventing  competition  need  little  comment 
here.  They  have  had  their  local  effects  of  altering  rates  and  of 
securing  more  business  at  first  while  alienating  public  respect  and 
confidence  and  ultimately  losing  business.  In  the  train  of  such 
actions  comes  a  magnified  public  demand  for  abolishing  such 
things  as  secrecy  of  accounts,  protection  of  contracts,  private 
selection  of  employees,  and  everything  which  tends  to  bring 
public  officials  under  undue  influence  of  the  corporation. 

Preventing  Overcapitalization.  —  A  company  will  be  in  strong- 
est position,  and  unhampered  in  meeting  any  local  competition 
which  it  may  desire  to  head  off  legitimately,  if  its  stocks,  bonds 
and  other  evidences  of  indebtedness  represent  only  tangible  ele- 
ments of  physical  property.  In  a  young  utility,  of  course,  there 
has  not  been  time  to  secure  out  of  earnings  funds  to  amortize 
plant-development  expenses,  while  business-development  and  all 


148  PUBLIC  UTILITY  RATES 

the  other  intangible  elements  in  worth  are  still  being  established. 
Even  in  many  of  the  older  utilities,  this  amortization  has  not  yet 
been  possible  and,  the  accumulated  deficits  between  actual  and 
reasonable  returns  on  investment  remain  in  the  "going  value" 
of  the  concern. 

The  attitude  of  commissions  in  general  has  not  yet  gone  as  far 
as  to  insist  on  a  complete  eventual  amortization  of  intangibles. 
While  that  is  not  impending  at  the  moment,  yet,  considering  the 
interests  of  future  generations  and  the  impossibility  of  our  com- 
prehending their  unknown  problems,  it  would  seem  advisable  to 
reduce  so  far  as  possible  the  burdens  they  will  inherit. 

Prominent  bankers,  in  laying  down  the  requirements  which 
must  be  satisfied  before  utility  bonds  can  be  carried  as  a  safe 
investment  and  in  discussing  the  causes  of  their  past  financial 
weaknesses,  have  emphasized  the  necessity  of  eliminating  high 
capitalization  —  which  is  indirectly  advocating  the  complete 
amortization  of  intangibles. 

High  capitalization  tends  to  obscure,  to  the  general  public  view 
at  least,  the  size  of  the  true  return  on  actual  investment  in  serv- 
ice, making  it  seem  small  when  in  reality  it  is  large.  On  such 
accounts,  there  is  a  marked  tendency  to  pay  no  attention  to  return 
on  stocks  and  other  securities,  but  to  consider  the  return  on  a 
probable  legitimate  investment  or  "fair  value." 

Looked  at  from  another  point  of  view,  it  is  reasonable  to  demand 
that  the  promoters  and  directors  furnish  a  considerable  proportion 
of  the  funds  needed  for  the  work  they  propose  to  control.  Any 
man  is  most  careful  of  his  own  money.  Moreover,  in  corporate 
organizations  the  liability  of  a  stockholder  for  the  concern's  debts 
is  limited  by  the  size  of  his  investment  so  that  the  combination  of 
large  bond  issues  and  small  amounts  of  stock  offers  greater  en- 
couragement for  mismanagement. 

In  direct  contrast,  it  seems  to  be  generally  regarded  as  more 
economical  to  use,  up  to  the  safe  limit,  funds  secured  from  bonds 
rather  than  from  stock  on  account  of  the  lower  interest  rate  sought 
by  the  former.  There  may  be  a  certain  amount  of  fact  behind 
this  belief,  but  seemingly  the  benefit  has  been  somewhat  over- 
estimated. The  smaller  the  proportion  of  capital  stock  to  total 
investment  the  greater  the  risk  of  losing  it  all  in  case  of  fore- 
closure by  bondholders  and  the  greater  the  per  cent  return  that 
would  be  demanded.  Also,  the  greater  the  preponderance  of 


INDIRECTLY  RELATED  PROBLEMS         149 

bond  money,  the  greater  is  the  risk  of  not  realizing  the  face  of 
bonds  on  foreclosure,  and  therefore  the  higher  the  probable  bond 
interest.  The  common  proportions  of  a  utility's  capitalization 
spoken  of  today  are  40%  stock  and  60%  bonds;,  stated  another 
way  the  face  of  the  bonds  is  150%  of  the  par  value  of  stock  — 
which  sounds  much  different.  This  ratio,  however,  is  a  most 
variable  condition,  and  is  fixed  by  judgment  rather  than  definite 
analysis. 

Broad  Public  Policy.  —  The  most  successful  public-utility 
corporations  of  the  future  seemingly  will  be  those  who  hold  to  a 
very  broad  public  policy  as  to  what  constitutes  adequate  service, 
reasonable  profit  and  local  obligations.  There  are  some  utility 
concerns  today  which  are  dominated  by  men  attempting  to  run 
their  affairs  in  the  light  of  such  a  policy,  but  suffering  still  from 
public  misapprehension  and  suspicion  which  prevent  the  best 
service  and  greatest  profits.  Eventually  they  must  approach 
their  desired  status  if  they  have  sincere  convictions  and  patience, 
though  they  may  first  pass  through  many  storms  of  abusive 
misunderstanding.  There  will  always  be  a  disgruntled  minority 
in  any  community  to  serve  as  a  thorn  in  the  side  of  the  manage- 
ment, but  this  can  only  have  a  healthy  effect  in  the  realization  that 
every  lapse  will  be  recorded,  every  move  scrutinized  and  every 
motive  searched.  Meritorious  effort  and  unimpeachable  character 
can  stand  such  opposition. 

By  broad  public  policy  is  meant  no  mere  ostentatious  display 
of  solicitude  for  the  "dear  people"  but  a  deep-seated  willingness 
to  pursue  certain  aims  all  unseen  and  unapplauded.  For  instance, 
directors  and  their  hired  officials  will  not  only  court  and  kindly 
receive  criticisms  but  really  sift  them  to  the  bottom  and  impress 
the  originators  with  some  definite  result  rather  than  mere  agree- 
able assurances.  Further,  any  increase  in  return  which  they 
think  reasonable,  they  will  discuss  frankly  before  the  public  and 
meet  and  disarm  criticism  rather  than  seek  to  crush  it  out.  In- 
creased profit  they  will  seek  as  the  result  of  securing  new  economies 
in  operation  rather  than  increased  rates.  New  economies  are 
impossible,  declare  many  utility  managers;  but  the  arts  progress 
and  some  bright  man  stumbles  on  a  neglected  point  every  few 
years  that  rnakes  a  new  equilibrium  possible  at  lower  costs. 

An  Utility  Should  Relieve  Public  Burdens.  —  Where  there  is 
any  question  about  the  extent  of  obligation  of  a  franchise  holder, 


150  PUBLIC  UTILITY  RATES 

it  would  seem  in  wise  accord  with  a  good  policy  to  concede  the 
rights  and  privileges  of  the  public  if  a  burden  is  actually  placed  on 
that  public  in  any  way  by  the  exercise  of  franchise  rights,  though 
the  cost  of  such  burdens  may  well  be  charged  to  operation.  For 
instance,  the  presence  of  street-railway  tracks  in  a  street  may  be 
destructive  to  a  pavement  ordinarily  adequate;  then  it  might  be 
fair  to  require  the  company  to  put  down  and  maintain  a  higher 
class  paving  between  tracks  and  for  a  foot  or  two  on  both  sides 
but  the  costs  thereof  should  go  against  capital  and  operation.  The 
electric  railway  may  stir  up  such  a  dust  as  would  not  rise  under 
vehicle  traffic,  whereupon  the  company  might  be  required  fairly 
to  sprinkle  its  tracks  and  perhaps  the  street  beyond. 

If  profits  are  fairly  high,  then  the  acceptance  of  cost  burdens 
which  unduly  and  unfairly  burden  the  public  would  in  most  cases 
cause  hardly  appreciable  reduction  in  profit  and  this  probably 
would  be  overcome  by  extra  business  turned  to  the  utility  through 
the  good  will  of  the  public.  Such  a  situation  if  properly  aired 
should  tend  to  win  public  confidence  and  thereby  be  worth  more 
than  the  cost.  If  profits  should  be  appreciably  reduced  a  wise 
regulating  commission  would  place  the  burden  on  customers  rather 
than  stockholders. 

Reduce  Company  Burdens.  —  The  ready  assumption  of  bur- 
dens properly  laid  on  an  utility  as  noted  above  is  not  to  be  adver- 
tised as  a  piece  of  generosity  on  the  part  of  the  corporation  toward 
the  public,  for  the  disturbance  occasioned  to  ordinary  municipal 
maintenance  by  the  utility  is  the  basis  of  the  burden.  On  the  other 
hand  there  is  an  equal  counterpart  obligation  on  the  part  of  munic- 
ipal officials  not  to  demand  questionable  obligations  where  no  real 
burden  is  placed  on  the  municipality  and  when  an  increase  in  rates 
or  decrease  in  earnings  is  the  means  of  relieving  the  people  of  ordi- 
nary tax  burdens.  Where  such  a  demand  is  made  on  the  public 
utility  it  can  more  successfully  be  resisted  if  the  concern  has  been 
following  a  comprehensive  policy  of  publicity  and  has  received 
public  confidence.  Various  events  have  repeatedly  demonstrated 
that  the  public  as  a  whole  will  demand  fair  play  and  will  follow 
any  strong  leader,  public  or  private  official,  in  demanding  security 
against  political  oppression. 

Secure  Full  Publicity.  —  Publicity  of  accidents,  plans,  statis- 
tics is  a  feature  of  a  broad  public  policy  that  may  almost  be  called 
a  local  obligation  and,  if  made  to  cover  everything  not  legitimately 


INDIRECTLY  RELATED  PROBLEMS  151 

detrimental  to  business  practice,  is  generally  conceded  best  cal- 
culated to  win  public  confidence  and  to  prevent  charges  of  im- 
proper activity  of  officials  or  subordinate  employees. 

Competition  or  Monopoly.  —  It  is  known  that,  up  to  a  cer- 
tain point  at  least,  there  is  a  possibility  of  increment  in  profits 
by  a  combination  of  similar  or  competing  businesses.  This  is  a 
great  cause  of  monopoly,  along  with  those  prospects  which  stim- 
ulate men  to  strenuous  and  continued  effort.  But  this  is  not  the 
only  recognized  cause  of  mergers.  There  seems  to  be  an  inherent 
desire,  on  the  part  of  men  responsible  for  certain  results,  to  pre- 
fer to  do  things  continuously  in  an  easier  and  more  efficient  way 
and  the  useless  duplication  of  plant  and  effort  must  always  appeal 
to  them  as  wasteful.  Moreover,  where  the  utility  is  one  of  com- 
munication like  the  telephone  or  telegraph  the  more  completely 
it  unites  all  possible  people  who  may  ever  desire  to  get  into  com- 
munication, the  better  it  performs  its  function.  Competing  com- 
munication systems  segregate  the  peoples,  making  access  more 
difficult  and  expensive,  and  oppose  the  motive  of  the  invention. 

Turning  aside  from  what  possibly  may  seem  academic  views 
of  monopoly,  into  actual  practice,  it  is  a  common  experience  that 
low  rates  for  adequate  and  satisfactory  service  have  not  resulted 
from  direct  competition  in  the  long  run.  In  theory,  and  under 
well  established  rate  regulation,  there  seems  little  justification 
for  competition  if  an  utility  lives  up  to  its  opportunities.  Where 
the  utilities  duplicate  equipment  so  that  neither  is  used  to  the 
extent  that  one  alone  could  be,  there  is  at  least  a  condition  tend- 
ing toward  inefficiency,  high  rates,  poor  returns  and  instability 
of  enterprise.  The  logical  result  is  failure  of  one  or  the  other 
enterprise  or,  before  that  happens,  a  consolidation  which  carries  an 
extra  burden  of  early  investment  that  must  be  liquidated  out  of 
earnings,  repudiated  by  the  present  generation  of  directors,  or 
saddled  upon  succeeding  generations  of  customers. 

Some  Results  of  Monopoly.  —  We  might  be  led  to  expect  that, 
with  the  suppression  of  competition  under  regulation,  we  would 
lose  a  powerful  stimulus  for  progress  in  an  art.  But  "regulation" 
implies  that  an  utility  would  not  be  stimulated  to  continue  in 
antiquated  fashion  for  it  would  be  allowed  to  earn  money  for 
renewing  obsolete  and  worn-out  machinery  and  should  be  encour- 
aged to  earn  constant  or  growing  super-profits  only  by  the  con- 
tinual attainment  of  new  economies  and  improved  services. 


152  PUBLIC  UTILITY  RATES 

Technical  progress  in  the  arts  and  sciences  involved  is  not  actually 
lost  by  suppression  of  competition  for  there  still  will  be  seen  many 
manufacturing  concerns  striving  to  secure  the  monopoly's  trade 
in  cars,  motors,  generators,  engines,  turbines,  rails,  wire,  poles, 
ties,  pumps,  pipe,  meters,  etc.,  and  apparatus  of  conspicuous 
merit  will  win  its  way. 

In  the  telephone  industry  there  seems  to  be  a  closer  approach 
to  universal  monopoly,  for  the  largest  holding  company  of  local 
exchanges  is  the  great  toll-line  owner  and  in  control  of  the  largest 
manufacturer  of  such  apparatus.  Yet  there  has  been  a  steady 
improvement  of  equipment  and  service  together  with  a  reduction 
in  cost  of  service  of  fully  half  in  20  years.  There  is  evidence  that 
it  is  impossible  to  so  monopolize  the  manufacturing  business  but 
what  an  outside  idea  of  conspicuous  and  radical  merit  will  batter 
its  way  in.  In  the  case  of  the  telephone  industry,  the  monopoly's 
allied  manufacturer  goes  out  after  the  business  in  private  and  iso- 
lated equipments,  which  brings  such  direct  and  immediate  com- 
petition that  stagnation  cannot  obtain. 

Lessons  from  Competition.  —  There  are  many  cases  where 
utilities  have  reduced  rates  under  stress  of  competition  (par- 
ticularly the  competition  of  municipally  owned  plants)  and  when 
there  was  strong  presumption  that  it  would  not  have  been  done 
otherwise.  These  have  occurred  under  no  regulation,  with  re- 
duced dividends  and  where  for  one  reason  or  another  the  company 
had  not  maintained  a  broad  policy  of  reducing  its  dead  capital 
and  putting  itself  in  trim  to  give  voluntarily  the  service  and  rates 
which  competition  forced.  These  cases  teach  many  lessons.  It  is 
wise  even  where  there  is  no  regulation  to  secure  depreciation, 
obsolescence  and  retirement  compensation  out  of  rates.  Where 
the  earnings  in  early  stages  in  utility  development  do  not  permit 
profitable  rates,  if  business  growth  is  to  be  secured  it  is  necessary 
that  the  public  be  frankly  informed  of  the  defaulted  retirance  and 
amortization  and  the  necessity  of  carrying  dead  capital  and 
accumulated  deficits  a  little  longer.  If  all  this  is  done  there  will 
be  no  great  danger  from  unfair  competition  for  the  private  utility 
is  in  good  shape  to  meet  it. 

Potential  Competition  a  Constant  Restraint.  —  While  unre- 
stricted direct  competition  in  public  services  has  signally  failed  to 
be  as  broadly  beneficial  as  wise  public  regulation  and  has  usually 
resulted  in  ultimate  consolidation  and  return  to  higher  rates,  yet 


INDIRECTLY  RELATED  PROBLEMS  153 

indirect  competition  still  prevails  to  limit  rates  or  to  fix  quality 
of  service.  Thus  with  electric  lighting  the  combined  factors  of 
cost  and  convenience  have  to  equal  the  cost-convenience  rating 
of  common  gas,  acetylene,  or  petroleum  lighting.  Central- 
station  electric  power  has  to  meet,  on  such  a  basis,  power  from 
individual  gas,  gasoline,  oil  or  alcohol  engines,  from  isolated  plants 
that  use  cheaper  fuel,  than  do  the  central  stations,  under  boilers  or 
in  gas  producers,  or  from  nearby  water  powers.  Local  electric  trans- 
portation, should  it  become  unattractive  or  unduly  expensive,  would 
be  supplanted  by  motor  busses,  motor  cars,  boats  or  even  horse 
vehicles,  and  for  short  distances  more  people  would  walk  than  ride. 

Lighten  Future  Burdens.  —  At  times  in  the  preceding  remarks, 
mention  has  been  made  of  the  tendency  to  impose  conditions  on 
future  generations  which  make  life  and  business  more  burden- 
some than  is  fan*.  The  idea  therein  is  that  even  if  our  present 
depredations  of  stored  natural  resources  were  wholly  justifiable, 
the  most  we  should  do  is  to  consume.  We  should  not  waste  or 
mortgage  the  future.  We  should  not  saddle  on  the  future  gen- 
eration the  discharge  of  our  obligations  for  machinery  and  im- 
provements which  will  be  non-existent  or  obsolescent  when  the 
burden  of  debt  is  discharged. 

Some  persons  contend  that  the  bonds  of  public-utility  concerns, 
secured  by  property  and  rights  hi  public  ways,  should  be  counted 
in  with  municipal  debt  in  any  estimate  of  the  burden  placed  on 
the  next  generation  for  public  improvement.  Such  contention 
seems  hardly  justifiable  if  depreciation  of  equipment,  retirement 
of  bond  issues  and  cancelation  of  intangible  values  are  provided 
for  simultaneously  from  earnings  —  as  by  trust  and  sinking-fund 
or  retirance  safeguards.  A  concern  so  protected  is  not  a  mere 
legacy  of  debt  to  posterity,  since  the  investment  may  be  returned 
to  stock-  and  bondholders.  The  menace  of  debt  comes  when  the 
obligation  to  pay  is  not  balanced  by  actual  cash  or  tangible  prop- 
erty in  hand,  assets  which  in  fact,  as  well  as  in  theory,  can  be 
traded  to  discharge  the  obligation.  Then  the  mere  existence  of 
interest-bearing  public-utility  bonds  or  other  evidences  of  invest- 
ment seems  hardly  a  menace  but  rather  an  evidence  of  capital  at 
work.  If  the  obligation  is  discharged  the  capital  will  not  long 
stay  idle.  The  owner  will  seek  for  it  a  new  activity  —  new  in- 
vestments and  new  obligations  but  with  the  same  old  burden  of 
interest  on  society  as  a  whole. 


154  PUBLIC  UTILITY  RATES 

As  an  example  of  a  real  and  common  debt  menace,  there  may 
be  cited  those  cases  where  a  state  or  city  issues  50-year  bonds  for 
improvements  (roads  and  pavements,  for  instance)  that  will 
last  only  ten  years.  Then,  ordinarily,  the  material  and  labor 
literally  are  frittered  away  (as  in  dust)  while  the  city  or  state 
has  failed  to  collect  more  than  a  fifth  of  the  sums  really  due  — 
leaving  on  a  future  generation  the  burden  of  our  pleasures  and  follies. 

No  Call  for  Industrial  Legacies.  —  On  the  other  hand,  it  seems 
hardly  justifiable,  with  our  ignorance  of  the  great  developments 
of  science  and  industry  25  or  50  years  hence,  to  conduct  our  public 
utilities  so  that  plants  without  proper  counterbalancing  obliga- 
tion equal  to  immediate  tangible  value,  may  be  passed  along  to 
succeeding  generations  as  a  pure  industrial  legacy  from  our  own 
times.  Each  generation  works  under  peculiar  conditions,  and  aid 
which  an  earlier  people  thinks  advisable  may  have  to  be  thrown 
aside  by  their  successors.  Each  generation  should  pay  for  the 
equipment  it  makes  obsolete. 

It  also  seems  probable  that  in  the  future  public,  sentiment  will 
demand  that  inroads  into  limited  natural  resources  for  public 
utilities  be  accompanied  by  economical  consumption,  the  complete 
utilization  of  waste  products  and  the  substitution  of  unlimited 
supplies  of  other  materials  where  possible  without  greatly  in- 
creased cost  —  as  in  the  case  of  alcohol  (from  vegetation)  for 
petroleum,  solar  heat  and  water  power  for  coal,  portland-cement 
concrete  and  clay  products,  for  timber,  etc. 

The  Vicious  Cost  Spiral.  —  Beyond  all  the  problems  recalled 
above,  there  is  another  very  different  in  nature  but  equally  mo- 
mentous. The  same  problem,  as  it  hits  the  great  mass  of  people, 
is  known  as  that  of  "the  high  cost  of  living."  It  is  a  fact  that 
living  expenses,  in  America  at  least,  have  risen  extraordinarily 
in  the  last  two  decades.  Even  discounting  the  greater  present- 
day  comforts,  the  more  exacting  tastes  of  all  classes  of  people, 
etc.,  the  cost  of  living  under  the  old  standards  would  be  much 
greater  today.  Naturally,  this  fact  has  been  the  basis  of  demand 
for  increased  wages  at  various  periods.  Their  justification  to  a 
considerable  extent  under  existing  industrial  and  economic  con- 
ditions has  been  generally  recognized  and  reasonable  advances 
have  been  made.  But  all  these  advances  in  wages  have  increased 
the  cost  of  production.  There  has  resulted  a  vicious  spiral  of 
high  prices  and  high  wages,  higher  prices  and  higher  wages,  still 


INDIRECTLY  RELATED  PROBLEMS         155 

higher  prices  and  more  wages  yet.  This  is  an  unstable  process 
that  continues  indefinitely  until  a  panic  or  some  catastrophe  dis- 
organizes production,  throws  labor  out  of  employment,  and  sends 
prices  of  material  and  labor  tumbling  down,  but  only  to  be  started 
on  the  upward  path  again. 

Preventing  Higher  Costs.  —  How  is  this  unfortunate  course 
of  rising  costs  to  be  checked?  Not  by  mere  legislative  enactment, 
for  the  laws  of  industry  and  human  nature  are  extraconstitutional 
and  inexorable.  If  a  rising  cost  of  food  and  necessary  living 
supplies  is  the  cause  of  the  demands  for  larger  wages  and  in  turn 
later  are  increased  by  higher  wages,  then  it  would  be  a  logical  step 
to  increase  the  efficiency  of  labor,  to  increase  the  production  of 
raw  materials,  and  to  lessen  the  cost  of  manufacture  into  supplies. 
The  improvements  that  can  come  in  these  ways  require  such  a 
fundamental  readjustment  of  existing  schemes,  that  progress  will 
be  slow.  Increased  production  is  secured  by  the  medium  of  higher 
prices  through  the  market  relations  of  supply  and  demand;  supply 
manufacturers  will  have  to  compensate  for  this  by  improving 
their  methods  and  details.  The  efficiency  enthusiasts  have  seen 
here  their  opportunity  and  are,  some  of  them,  vociferously  pro- 
claiming the  wonders  that  can  be  performed. 

Utilities  are,  for  the  most  part,  the  great  general  exceptions 
among  industrial  enterprises,  hi  that  the  cost  of  product  or  service 
to  the  consumer  has  gone  down  continually.  This  is  more  true 
in  gas  and  electricity  works  than  in  water  supply  for  instance,  due 
to  the  importance  of  machinery  and  the  development  of  high-speed 
or  large-size  low-output-cost  apparatus  in  the  two  first  cases  and 
the  large  investment  in  watersheds,  aqueducts,  mains,  reservoirs, 
dams,  filters,  etc.,  hi  the  third  case.  Railways  and  electric  roads 
perhaps  have  an  intermediate  place  because  of  the  great  costs  of 
labor,  particularly  in  electric  railways  where  it  may  amount  to 
50%  of  the  total  annual  expenditures. 

Reduce  Unit  Labor  Costs.  —  All  this  emphasizes  the  need  of 
making  labor  more  effective,  for  in  those  utilities  where  cost  of 
labor  is  a  large  factor  in  cost  of  service,  the  limit  is  about  or  quite 
reached  below  which  cost  of  service  to  patrons  cannot  go  (without 
marked  decrease  in  wage  rates).  Reduction  of  wages  may  be 
expected  only  if  the  cost  of  family  supplies  drops.  Securing  a 
greater  productivity  of  labor  alone  is  a  difficult  and  delicate  prob- 
lem. Here  enters  study  of  the  extent  to  which  welfare  work, 


156  PUBLIC  UTILITY  RATES 

cooperative  buying  and  insurance,  medical  supervision,  etc.,  are 
economical  propositions.  Here  enter  the  labor  union,  the  uniform 
wage  scale,  the  closed  shop,  the  stifling  of  personal  effort,  etc. 

Every  man  of  the  utility  force,  from  the  president  down,  can 
well  ask  himself  if  he  is  really  giving  the  effort  contracted  for 
and  paid  for.  There  would  be  great  good  from  such  a  decided 
quickening  of  the  conscience  of  every  man  in  utility  circles  — 
from  highest  to  lowest.  "Economy"  needs  to  be  a  watchword 
with  each  of  these  thousands  of  persons;  all-around  economy  is 
most  important  in  arresting  the  upward  trend  in  the  cost  of  labor 
and  supplies.  The  "dignity  of  labor"  has  been  often  stated;  we 
now  need  to  hear  more  of  the  dignity  of  economy.  However, 
expenditures  in  securing  true  economy  are  not  to  be  cut  off  by  a 
mere  penny-wise  policy  which  saves  today  but  penalizes  tomorrow. 

Cause  of  Inefficient  Labor.  —  Why  is  much  labor  less  effective 
in  this  country  today  than  once?  Perhaps  it  lies  in  the  very  evi- 
dent discontent  of  labor,  and  if  so  the  question  resolves  itself  into 
these:  Why  is  labor  discontented?  Is  there  good  reason?  Can 
contentment  take  its  place? 

There  is  some  evidence  that  the  large  degree  of  political  liberty 
attained,  and  the  advancement  of  broader  human  rights,  has  not 
been  accompanied  by  increasing  industrial  freedom.  Speaking 
of  conditions  in  this  country  alone,  it  is  not  debatable  that  workers 
very  largely  are  more  dependent  than  ever  before  on  large  and 
impersonal  organizations  for  employment,  wages,  necessities  of 
life,  transportation,  and  even  pleasures.  This  is  a  condition 
notoriously  and  naturally  depressing  and  in  great  contrast  with 
the  situation  a  half  century  ago  and  less. 

To  promote  satisfaction  in  daily  work,  there  are  certain  easily 
recognizable  aids  which  may  to  a  large  extent  offset  the  depressing 
effects  of  employment  by  massive  organization,  and  of  the  present 
extreme  division  of  labor  with  its  monotony  in  repetitive  tasks 
automatically  performed. 

Satisfactions  of  Labor.  —  The  first  of  these  aids  is  complete 
personal  industrial  freedom  of  the  worker  to  select  his  occupation 
and  employer  (within  the  limits  of  his  own  skill  and  the  willingness 
of  some  one  to  use  it),  freedom  to  earn  all  that  his  skill  and  efforts 
can  command,  freedom  to  advance  in  his  trade  or  occupation, 
freedom  from  any  tyrannical  dictates  of  other  workmen  which 
may  hold  him  down  to  average  performance  and  pay. 


INDIRECTLY  RELATED  PROBLEMS  157 

A  second  aid  is  increased  pleasure  in  the  daily  tasks  of  livelihood 
-  through  the  sense  of  power  that  comes  from  exercise  of  muscle 
and  mind  to  some  definite  end,  through  a  knowledge  of  enough 
elementary  science  to  see  a  reason  for  each  process.  It  is  gener- 
ally supposed  that  the  monotony  of  repetitive  tasks,  as  in  a  modern 
factory  system,  is  death  to  this  pleasure.  For  some  types  of 
minds  this  evidently  is  the  case  but  it  is  not  so  for  others,  as 
psychological  research  has  begun  to  show.  The  square  peg  should 
not  be  in  the  round  hole. 

More  or  less  allied  with  the  aid  of  a  suitable  occupation  to 
greater  satisfaction  in  and  effectiveness  of  labor,  is  the  pleasure 
of  completed  accomplishment.  There  seems  to  be  more  appeal 
to  an  inherent  creative  faculty  if  the  daily  tasks  are  such  that 
some  definite  thing  is  seen  to  be  made  or  some  definite  part  com- 
pleted of  a  larger  task  on  which  many  are  employed.  It  is  this 
appeal  that  makes  the  higher  professions  attractive  fields  of  labor. 
Some  of  the  extremes  to  which  labor  has,  been  divided  in  mass 
production  under  modern  factory  organization  are  commonly 
credited  with  preventing  a  workman's  vision  of  a  completed 
creation,  but  there  is  little  real  knowledge  of  the  soundness  of  this 
theory.  Possibly  the  studies  of  practical  psychologists  and  soci- 
ologists, noted  above,  may  illuminate  this  matter  also. 

A  fourth  play  of  the  usually  unrecognized  emotions,  tending  to 
greater  interest  in  daily  tasks,  is  a  sense  of  competition  and  co- 
operation —  contest  and  team  work.  It  is  another,  and  less 
openly  exhibited  manifestation  of  the  world  of  sport  —  the  zest  of 
a  foot  race  or  of  a  broad  jump  on  one  hand,  the  thrill  of  a  ball 
game  on  the  other  hand.  Here,  again,  it  would  seem  as  though 
an  extreme  division  of  labor,  as  in  the  factory,  would  keep  team 
work  to  a  minimum  though  perhaps  would  not  stifle  the  sense  of 
competition.  The  contribution  of  each  worker  toward  the  ulti- 
mate completed  machine  or  other  marketable  product  may  be 
lost  in  the  general  assembly  so  that,  while  many  work  to  a  com- 
mon end,  each  knows  not  what  the  other  has  contributed. 

Not  last  in  this  or  any  list,  which  one  would  draw  up  of  the 
intangible  elements  in  employment  that  promote  mental  satis- 
faction and  personal  efficiency  are  risk  and  adventure.  The  sea 
has  always  lured  many  to  its  occupations,  the  army  and  navy 
recruits  greatly  increase  on  intimations  of  international  difficulties. 
An  adventurous  occupation  must  involve  risk  or  it  ceases  to  be 


158  PUBLIC   UTILITY  RATES 

adventurous  and  becomes  merely  varied.  The  danger  must  be 
such  that  there  is  a  gambler's  chance  of  escaping  it  and  some  com- 
pensation in  pay,  or  glory,  or  in  sport.  The  appeal  of  business  is 
much  the  same;  there  is  the  chance  to  win  or  lose,  to  make  or  break. 

Utility  Labor  in  an  Enviable  Position.  —  There  may  be  various 
other  elements  which  can  be  set  down,  but  with  one  exception 
enough  has  been  said  to  show  some  important  lines  which  may  be 
scrutinized.  This  last  is  possibly  dependent  on  the  existence  of 
most  of  the  other  elements  outlined  and  it  arises  from  their  appeal. 
These  are  pride  and  loyalty  —  pride  in  the  trade  or  occupation  or 
profession,  loyalty  to  fellow  workers,  and  to  employers.  If  a 
gainful  pursuit  yields  most  of  the  higher  satisfactions  already  noted 
there  must  be  some  sense  of  pride  in  such  a  livelihood.  And  least 
of  all,  there  can  be  a  just  pride  in  being  an  independent  self- 
sustaining  citizen  —  a  supporter  of  organized  government,  not  a 
beggar  from  the  hand  of  charity.  Any  employer  in  whose  works 
the  various  satisfactions  of  the  workers  are  cultivated,  even 
though  modern  business  dictates  that  it  is  a  physical  impossibility 
to  know  each  man  in  the  organization,  must  find  loyalty  in  the 
men  —  to  the  extent  that  he  probably  has  earned  it. 

All  the  public  utilities  are  in  an  enviable  position,  among  in- 
dustrial organizations,  for  increasing  the  contentment  of  employees. 
The  tasks  are  not  often  as  repetitive  as  in  a  factory  and  there  is  a 
maximum  of  play  for  muscular  force  and  judgment.  The  tasks 
are  complete  in  themselves  and  the  toiler  sees  his  work  as  needful 
and  creative.  There  is  no  end  of  possible  competition  between 
fellow  workers  to  do  better  than  each  other.  All  see  easily  how 
their  function  is  added  to  all  the  others  to  make  the  service  real, 
and  frequently  the  cooperation  is  hand  to  hand  and  mind  to  mind 
under  the  stimulating  stress  of  emergency.  Few  lines  of  public 
service  are  without  some  danger  and  some  adventure;  few  can 
be  so  hedged  as  that  it  is  not  necessary  to  strive  for  greater  safety 
to  all,  for  larger  gains  to  employer  and  employee,  and  for  better 
convenience  to  the  customers. 

The  utility  concerns  should  recognize  the  inherent  advantage 
they  have  and  seek  to  perpetuate  it.  The  advantage  is  real  but 
it  can  be  neglected  and  finally  wasted. 

Higher  Rates  or  Greater  Economy.  —  Marked  evidence  is 
seen  among  many  utility  officials  of  more  or  less  organized  effort 
to  increase  rates  all  along  the  line.  Of  course,  if  their  business  is 


INDIRECTLY  RELATED  PROBLEMS  159 

well  organized,  if  scientific  study  of  avenues  of  economy  in  mate- 
rials and  of  productivity  of  labor  is  maintained  and  in  spite  of  all 
advice  they  can  see  no  improvement,  there  is  every  justification 
of  educating  the  public  and  persuading  the  regulating  commissions 
that  higher  rates  are  needed.  But  there  have  been  some  cases  of 
vociferous  demand  for  higher  rates  to  prevent  calamity,  where 
equal  energy  applied  at  home  to  the  study  of  organization  of  men 
and  use  of  materials  and  labor  would  go  a  great  way  toward  the 
desired  goal  of  larger  dividends. 

Scarcity  of  Funds  for  Investment.  —  At  various  times  there 
has  been  a  manifest  difficulty  in  finding  the  money  at  satisfactory 
rates  of  interest  for  new  industrial  enterprises  of  any  sort.  Par- 
ticularly has  this  been  true  off  and  on  since  1907.  The  cause  of 
this  is  closely  linked  with  the  cause  of  higher  cost  of  living  (or  the 
cost  of  higher  living  perhaps)  and  the  course  suggested  as  the 
logical  attack  of  the  one  will  automatically  bring  relief  from  the 
other.  For  instance,  if  the  efficiency  of  labor  is  increased  by 
better  organization  of  the  men  and  their  work,  by  increased  satis- 
faction in  working,  and  by  more  conscientious  effort  from  all, 
operating  costs  will  go  down  and  a  surplus  will  be  available  for 
extensions  or  the  better  dividends  needed  to  attract  capital. 

The  capital  that  any  one  man  can  invest  in  gainful  enterprise 
is  necessarily  the  surplus  of  his  earnings  over  his  expenses;  the 
more  economical  he  is  the  more  capital  he  has  available.  A  nation 
is  made  up  of  such  individuals  and  the  total  capital  available  for 
new  enterprises  and  extensions  of  old  ones  is  the  sum  of  the  surplus 
of  all  the  individuals  great  and  small.  This  is  often  disregarded 
by  those  who  discourse  on  the  evil  times  which  they  hold  prevail. 

Just  why  there  is  such  a  close  relation  between  lack  of  individ- 
ual savings  and  industrial  stagnation,  may  be  seen  from  another 
view  of  conditions  which  exist  when  the  people  largely  live  up  to 
their  income.  The  more  money  there  is  spent  in  unnecessary 
living  expenses  the  more  people  there  are  engaged  in  supplying 
these  fancied  needs,  and  the  fewer  there  are  available  for  work  of 
industrial  extensions  —  as  well  as  the  less  money  available  for 
investment.  Under  such  conditions  labor  tends  to  become  high- 
priced  and  inefficient.  "Easy-money"  and  "sure"  jobs  cultivate 
further  extravagant  expenditures  and  small  surplusses.  The  evil 
effects  pyramid  up.  The  dignity  of  economy  needs  to  be  accentu- 
ated now  and  humility  in  labor  for  each  and  all,  high  and  low. 


160  PUBLIC  UTILITY  RATES 

Better  Public  Relations.  —  Very  few  of  the  public  utilities  of 
the  country  enjoy  the  confidence  and  approval  of  the  public  which 
they  serve,  to  an  extent  which  both  managers  and  customers  would 
like.  In  a  few  cases,  the  hostility  or  coldness  is  perhaps  absolutely 
unmerited;  but  the  author  has  come  in  personal  contact  with  the 
service  of  a  few  companies  where  there  was  every  reason  to  expect 
harmonious  public  relations  on  account  of  good  engineers,  well- 
known  managers,  good  earnings,  welfare  work  for  employees,  etc., 
etc.,  but  where  the  services  were  irregular  and  inadequate,  the 
employees  in  contact  with  the  public  uncivil,  the  result  of  com- 
plaints unseen  and  the  whole  ultimate  effect  disappointing  —  not 
to  say  exasperating. 

This  experience  has  been  duplicated  by  others  in  various  quar- 
ters, and  naturally  the  question  arises  "How  is  it  possible?" 
Perhaps  it  is  due  to  an  earlier  unsavory  history  kept  alive  by 
petty  grievances.  Perhaps,  in  spite  of  the  men  of  prestige  (or 
is  it  mere  self-advertisement?)  in  the  offices,  there  is  a  lack  of 
company  loyalty,  or  a  lack  of  opportunity  for  leaders  to  rise  out 
of  the  ranks,  and  other  matters  of  short-sightedness  and  mis- 
management. 

Better  Ideas  of  Service  Needed.  —  Surely  in  many  towns  it  is 
seen  that  no  one  there  has  learned  the  meaning  of  the  word  "serv- 
ice"; the  mayor  seems  to  regard  himself  as  a  political  sun  around 
which  the  municipal  constellation  moves,  instead  of  considering 
himself  only  the  first  servant  of  the  people;  the  policeman  seems 
to  think  that  he  is  there  to  keep  the  citizens  out  of  mischief  more 
than  to  help  them  preserve  organized  order,  safety,  and  govern- 
ment; the  street-car  motorman  and  conductor  give  the  impression 
that  the  customers  exist  only  to  keep  the  cars  running  and  to 
furnish  a  job;  the  electric-station  and  water-service  meter  reader 
comports  himself  with  the  air  of  one  who  is  dispensing  great  favors 
rather  than  making  a  necessary  intrusion  to  keep  the  service  up. 

The  American  people  from  top  to  bottom  could  well  be  schooled 
to  greater  humility.  All  are  servants  of  one  another,  and  life  is 
happy  and  successful  in  proportion  to  the  service  given  others. 
Service  and  humility  are  not  degrading;  indeed  they  are  attributes 
of  the  noblest  characters,  while  selfishness  and  arrogance  mark 
the  person  of  inferior  ideals.  Such  remarks  are  ordinarily  very 
trite,  but  are  repeated  here  for  behind  them  are  lessons  that 
countless  utility  officials  and  employees  may  well  learn. 


CHAPTER  X 
PROBLEMS   OF  RAILWAY  RATES 

Problems  of  Specific  Utilities.  —  In  attempting  the  applica- 
tion of  the  preceding  general  discussions  to  particular  utility 
fields,  and  in  reviewing  certain  specific  problems  of  the  different 
services  —  with  which  these  studies  will  be  brought  to  a  close  — 
attention  is  naturally  first  directed  to  the  railways.  This  is 
logical,  for  the  railroads  of  the  country  were  among  the  earliest 
of  the  present  great  public  utilities  and  today  constitute  the 
largest  group.  The  legislation  aimed  to  effect  their  proper  regu- 
lation has  been  to  a  large  extent  the  prototype  of  all  American 
utility-regulation  acts,  and  the  oldest  and  most  representative 
general  regulating  bodies  grew  out  of  "  railroad  commissions." 
The  leading  expositions  of  the  Supreme  Court  now  broadly 
applied  to  various  utility  cases  were  —  with  a  few  notable  ex- 
ceptions —  given  in  railroad  litigation. 

In  spite  of  railroad  regulation  furnishing  the  foundation  for 
the  present  structure  of  utility  control,  much  less  has  been  done 
in  establishing  a  logical  arrangement  of  rates,  in  place  of  the  old 
inherited  complication  of  transportation  charges,  than  in  setting 
up  scientifically-adjusted  prices  for  water,  gas,  electric  and  other 
services.  The  following  paragraphs  will  show  the  reason  for 
this;  in  brief,  tremendous  difficulties  arise  to  the  arranging  of 
any  logical  scheme  at  all,  on  account  of  the  infinite  number  of 
different  services  rendered  the  shippers  of  freight. 

This  discussion  of  matters  affecting  railroad  rates  is  not  in- 
tended as  a  complete  exposition  of  how  railway  rates  are  or  should 
be  made.  There  are  plenty  of  works  on  that  subject  without 
adding  to  the  number  now.  But  enough  can  be  shown,  in  com- 
paratively small  space,  to  demonstrate  to  men  in  all  other  utility 
fields  the  sort  of  complications  that  enter  because  of  the  larger 
areas  and  more  diverse  communities  served  in  a  multiplicity  of 
peculiar  ways. 

161 


162  PUBLIC  UTILITY  RATES 

Magnitude  of  the  Railway  Industry.*  —  There  were,  in  1915, 
257,569  miles  of  railway  line  in  the  country,  and  the  total  track- 
age had  risen  to  391,142  miles.  There  were  in  service  65,099 
locomotives  (14,700  in  passenger  service)  and  2,507,997  cars 
(55,705  in  passenger  service).  The  securities  behind  this  prop- 
erty totalled  $21,127,959,078.  The  total  number  of  revenue 
passengers  per  year  was  976,303,602  (32,384,247,563  carried 
one  mile)  and  the  tons  of  revenue  freight  were  1,802,018,177 
(276,830,302,723  carried  one  mile).  These  figures  are  of  such 
great  magnitude  that,  standing  alone,  they  become  nearly  mean- 
ingless; their  significance  is  shown  only  by  comparison.  For 
each  1000  persons  in  the  country  (total  population  taken  as 
100,399,000)  there  were  about  3.9  miles  of  track,  25  cars,  and 
$210,000  in  nominal  property.  The  average  number  of  rides  per 
capita  had  risen  to  10.5  per  year  and  the  tons  of  freight  moved 
per  capita  per  year  had  mounted  to  18.  The  total  income 
was  $2,956,193,202  or  $29.50  per  capita;  the  operating  expenses 
$2,088,682,956  or  $20.80  per  capita.  (The  passenger  and  freight 
business  in  this  year,  1914-15,  was  slightly  less  than  in  1913-14.) 

Beginnings  of  the  Railway  Industry.  —  The  vast  industry, 
whose  outstanding  size  has  been  lightly  touched  upon,  is  about 
90  years  old.  The  first  American  line,  the  Quincy  "  Granite 
Road  "  was  a  mere  horse  tramway  laid  down  in  1826  for 
getting  granite  for  the  Bunker  Hill  monument  from  Quincy 
down  to  a  wharf  on  the  Neponset  River,  f  But  the  franchise 
was  purchased  in  1871  by  the  Old  Colony  R.  R.  Co.,  and 
eventually  entered  the  New  York,  New  Haven  &  Hartford 
system. 

The  South  Carolina  R.  R.  (a  stock  concern)  was  formally 
opened  in  Charleston,  Jan.  15,  1830.  Pennsylvania  had  a  road 
in  1827,  and  Maryland  and  South  Carolina  followed  in  1828.  A 
part  of  the  New  York  Central,  the  Mohawk  Valley  R.  R.,  from 
Albany  to  Schenectady,  was  chartered  in  1825.  On  it  a  steam 
train  had  a  trial  trip  Mar.  5,  1831  with  the  famous  locomotive 
"  De  Witt  Clinton."  Stimulated  by  the  success  of  the  British 

*  Deduced  from  the  1914-15  annual  "  Statistics  of  Railways,"  of  the  Inter- 
state Commerce  Commission. 

t  See  "  Railroads,  Their  Origin  and  Problems,"  New  York,  1878,  by  C.  F. 
Adams,  Jr.  For  other  early  history  read,  "  Railroad  Transportation,"  1886, 
by  A.  T.  Hadley. 


PROBLEMS  OF  RAILWAY  RATES  163 

steam-traction  experiments,  the  Boston  &  Lowell,  Boston  & 
Providence,  and  the  Boston  &  Worcester  roads  were  chartered, 
built  and  operated  in  1830-1835.  These  were  all  opened  about 
the  same  time  and  were  the  beginning  of  the  present  New  York, 
New  Haven  &  Hartford  system. 

The  whole  railway  development  in  these  early  years  and  since 
has  been  in  private  hands;  in  1915  the  Federal  government  built 
its  first  railroad  line  —  the  Alaskan  Ry.  —  though  in  1905  it 
purchased  the  Panama  R.  R.  as  a  construction  adjunct  to  the 
Panama  Canal.  It  happened  that  at  the  time  when  the  prac- 
ticability of  steam  locomotion  became  demonstrated,  and  the 
possibilities  in  a  new  transportation  service  began  to  be  dimly 
foreseen,  sufficient  public  funds  could  not  be  raised  for  railway 
construction  and  organization.  A  certain  amount  of  public  con- 
struction and  operation  was  tried  at  the  outset  and  did  precede 
the  general  organization  of  the  industry  in  private  hands.  For 
instance,  the  Michigan  Central  and  Michigan  Southern  were 
started  as  state  lines  but  the  financial  depression  of  1837  forced 
their  sale.  The  notable  Western  and  Atlantic  line  from  Atlanta 
to  Chattanooga  was  started  by  the  State  of  Georgia.  Public 
initiative  was  not  strong  enough  to  override  the  first  financial 
barriers,  but  public  aid  was  not  hard  to  obtain;  private  enter- 
prise was  stimulated  by  obvious  opportunities  for  grand  profits. 
The  resulting  unsavory  history  of  early  railroad  promotion  was 
but  a  repetition  of  the  old  country-wide  scandals  in  canal  build- 
ing prior  to  1835. 

Development  of  Governmental  Regulation.  —  A  fundamental 
public  interest  in  railways  has  always  been  assumed  to  exist, 
though  in  the  early  days  apparently  it  was  not  held  to  be  a  matter 
of  prime  importance.  Public  regard  for  railways  first  was  like 
that  for  the  previous  "  common  carriers  "  -  with  such  later 
limitations  to  the  use  of  independent  vehicles  as  were  found 
necessarily  to  go  with  faster  transportation,  special  track  and  a 
more  complete  network  of  lines.  That  railways,  by  depending 
on  the  public  for  business  and  offering  their  facilities  to  the 
general  public,  thereby  take  their  property  out  of  the  class  of 
private  property  and  relinquish  the  right  of  complete  control, 
was  a  principle  of  common  law  unmistakably  enunciated  by 
Chief  Justice  Waite  in  the  historic  case  of  Munn  v.  Illinois  (94 
U.  S.  113)  early  referred  to  in  these  pages. 


164  PUBLIC  UTILITY  RATES 

Power  of  Eminent  Domain  an  Early  Mark.  —  The  evidence  of 
public  interest  in  railways  goes  back  much  beyond  1876,  the  date 
of  the  Munn  case,  for  the  public  nature  of  the  business  was  early 
recognized.  It  was  seen  to  be  essential  to  the  development  of 
land  transportation  lines  that  the  power  to  condemn  and  appro- 
priate property  be  invoked.  The  railway  right  of  way  had  to 
be  a  continuous  strip  of  land  carved  out  of  hundreds  or  thousands 
of  smaller  parcels  —  else  the  owner  of  any  one  parcel  could  delay 
or  kill  a  project  by  refusal  to  sell.  If  more  than  a  few  held  out 
for  extortionate  prices  the  prospective  first  cost  —  and  annual 
fixed  charges  —  on  the  proposed  line  became  an  excessive  burden 
on  the  public.  But  under  American  constitutional  principles, 
the  right  of  eminent  domain  conferred  on  railroads  was  a  mark 
of  sovereignty  —  a  public  function  possible  only  for  definite 
public  good.  If  the  state  did  not  choose  to  condemn  the  land 
and  build  the  carrier  line,  it  could  delegate  this  power  to  a  concern 
created  by  it  for  public  purposes  —  and  only  to  such. 

All  such  matters  show  that  the  right  of  public  supervision 
of  railways,  though  long  unemployed  effectively,  has  been  re- 
garded as  inherent,  fundamental,  inalienable.  This  principle  was 
enunciated  by  the  courts  in  the  cases  of  railways  as  highways  and 
common  carriers;  it  has  been  applied  by  analogy  to  any  utility 
service  taking  on  public  interest  —  the  degree  of  control  depend- 
ing on  the  extent  and  depth  of  public  concern.  This  may  develop 
the  possibility  of  a  closer  public  dictation  of  railway  manage- 
ment than  is  lawful  in  utilities  where  no  rights  of  condemnation 
and  appropriation  have  been  conferred  —  like  most  gas,  water 
and  electric-transmission-line  companies. 

Early  Beginnings  of  Public  Regulation.  —  Public  control  of 
railroads  was  not  a  live  matter  for  about  a  quarter  century  after 
railway  expansion  really  started.  The  great  aim  was  to  get  the 
roads  built.  The  public  then  did  not  realize  the  magnitude  of 
the  systems  that  might  develop  nor  did  it  quickly  appreciate  the 
power  of  natural  monopolies.  Competition,  "  the  soul  of  trade," 
was  popularly  regarded  as  the  complete  and  satisfactory  regu- 
lator of  all  business,  although  it  had  been  pointed  out  abroad  that 
"  where  combination  was  possible,  competition  was  impossible." 

The  awakening  came  nearly  simultaneously  in  America  and 
Europe.  The  British  Parliament  had  felt  for  years  that  there 
was  something  indefinitely  ominous  hanging  over  the  country 


PROBLEMS  OF  RAILWAY  RATES  165 

because  of  the  growth  and  consolidation  of  the  country's  railways. 
Finally  in  1872  a  Parliament  committee  reported  that  the  bogey 
was  only  a  natural  consolidation  of  lines  which  once  it  had  been 
supposed  would  continue  to  compete.  Ii>  was  judged  that  con- 
solidation was  inevitable  and  required  only  the  safeguard  of  some 
public  supervision  over  the  railways.  In  1873  a  board  of  com- 
missioners was  created  to  guard  the  rights  of  private  persons,  to 
prevent  trouble  between  roads,  to  insure  interchange  of  traffic, 
and  to  prevent  discrimination. 

In  America  the  early  years  of  pioneer  development  were  suc- 
ceeded by  a  period  (from  about  1860)  of  destructive  competition 
and  oppressive  discrimination.  The  flagrant  injustice  meted 
out  by  arrogant  railway  officials,  who  openly  declared  themselves 
to  be  above  public  scrutiny,  stimulated  two  quite  different  plans 
for  regaining  the  upper  hand  for  the  public. 

In  the  one  case  there  was  ready  at  hand  a  vigorous  organiza- 
tion of  farmers  known  as  the  "  Grange,"  *  whose  members  were 
revolting  at  the  treatment  afforded  by  the  railways. 

The  Grangers'  vitriolic  attacks  on  railway  officials  broke  open 
the  situation  in  the  West  and  secured  the  enactment  of  drastic 
laws  interfering  with  the  asserted  rights  of  common  carriers  and 
subjecting  the  roads  to  the  control  of  state  commissioners.  The 
early  laws  were  crude  and  the  first  commissioners  were  neces- 
sarily inexperienced;  both  laws  and  men  were  pitted  against 
organization,  wealth  and  brains.  Looking  back,  it  is  phenomenal 
that  any  considerable  success  was  attained.  Possibly  the  roads 
overreached  themselves  in  their  first  arrogant  independence  — 
for  after  they  finally  bowed  to  the  Supreme  Court's  affirmation 
of  the  right  of  state  control  they  proved  more  formidable  in 
attack  than  ever  before. 

*  The  "Order  of  Patrons  of  Husbandry"  or  the  "Grange,"  as  it  was  com- 
monly called,  was  founded  in  1867  by  O.  H.  Kelley,  of  the  (then)  U.  S.  Bureau 
of  Agriculture.  It  was  the  most  successful  of  several  attempts  of  farmers  to 
organize  for  mutual  benefit.  The  society's  greatest  development  was  from 
1872  on,  in  Iowa  where  100,000  members  were  enrolled  in  two  years.  In  1875 
there  were  a  million  members  in  the  country.  Later  its  power  waned  with  the 
rise  of  the  more  political  "  Farmers  Alliance."  The  aims  of  the  Grange  were 
social  and  technical  as  well  as  political.  It  aimed  to  disseminate  good  techni- 
cal information  about  crops,  cultivation,  markets  and  transportation.  It  hoped 
also  to  organize  the  farmers  for  cooperative  buying  and  selling,  to  oppose 
monopolistic  railways,  banks,  implement  makers  and  produce  speculators. 


166  PUBLIC   UTILITY  RATES 

Meanwhile  things  were  working  out  differently  in  the  East. 
For  instance,  Massachusetts  organized  its  "  advisory "  com- 
mission in  1869  *  and  gave  it  but  one  weapon  —  publicity.  To 
support  itself  before  the  public,  careful  study  had  to  be  made  of 
any  complaints  and  a  report  stood  on  its  merits.  In  1876  the 
Massachusetts  publicity  measure  was  completed  by  the  im- 
position of  uniform  accounts  and  complete  reports  —  a  develop- 
ment toward  which  the  railways  materially  cooperated. 

The  two  movements  gradually  consolidated.  It  began  to  be 
realized  that  it  was  an  exaggeration  of  fear  which  the  Grangers 
had  had  for  the  "  money  barons,"  the  "  eastern  sharks,"  and  the 
"  bloated  bondholders,"  —  to  quote  common  epithets.  In  1877 
the  Illinois  Commission  began  to  adopt  the  advisory  and  con- 
ciliatory tactics  of  the  Massachusetts  Commission;  that  year 
Iowa  replaced  its  Granger  law  with  one  more  of  the  Massachu- 
setts type.  From  then  the  influence  of  publicity  was  widely 
recognized;  the  more  speedy  action  secured  under  some  condi- 
tions by  commission  interference,  however,  was  not  forgotten. 

The  Interstate  Commerce  Commission  Established.  —  State 
regulation  of  railways  has  necessarily  been  of  comparatively 
minor  importance  as  by  the  commerce  clause  of  the  Federal  Con- 
stitution, all  transportation  of  persons  and  goods  from  one  state 
to  another,  or  going  abroad,  is  under  the  exclusive  control  of 
the  Federal  Government.  This  clause  arose  from  the  impelling 
necessity  of  facilitating  commerce  between  the  colonies  freed 
from  England.  Indeed  it  was  the  pressing  demands  for  un- 
fettered commerce  that  drew  the  constitutional  convention  to- 
gether when  the  local  interests  and  jealousies  threatened  to 
override  the  other  grounds  for  unification. 

The  more  or  less  successful  attempts  at  state  regulation  of 
railways  only  emphasized  the  need  of  Federal  supervision  if 
effective  control  was  to  be  secured.  There  was  undoubtedly 
great  direct  influence  toward  Federal  regulation  exerted  by  the 
Granger  agitations.  The  Interstate  Commerce  Act  was  not 

*  Although  the  Massachusetts  Railroad  Commission  made  the  greatest 
impression,  it  was  not  the  earliest;  Rhode  Island  had  one  in  1836 — but  it  died 
of  inanition,  —  New  Hampshire  hi  1844,  New  York  in  1850,  Connecticut  in 
1853,  Vermont  hi  1855,  Maine  in  1858,  Ohio  in  1867,  etc.  See  F.  Hendrick, 
"Railway  Control  By  Commission,"  1900;  B.  H.  Meyer,  "Railway  Legisla- 
tion in  the  U.  S.,"  1903. 


PROBLEMS  OF  RAILWAY  RATES  167 

passed,  however,  until  1887,  13  years  after  first  introduced,  and 
then  after  persistent  efforts  of  Representative  Reagan,  of  Texas, 
and  Senator  Cullom,  of  Illinois.  The  original  act  prohibited 
unreasonable  and  unjust  rates,  rebates,  and  discriminations,  and 
required  the  publication  of  rates  and  detailed  financial  state- 
ments. Pooling,  and  greater  charges  for  a  shorter  than  a  longer 
haul  under  similar  conditions  were  prohibited.  A  commission 
was  established  and  its  orders  were  to  be  enforced  by  the  Federal 
courts,  to  whom  also  appeals  might  be  made.  This  imposition 
of  court  control  in  the  end  emasculated  the  law.  The  first 
result  was  that  the  courts  really  decided  the  cases  which  merely 
originated  before  the  Commission  —  an  expensive  and  time  con- 
suming procedure.  In  1890  the  Supreme  Court  decided  that 
witnesses  could  not  be  compelled  to  answer  questions  in  the  com- 
merce cases.  In  1897  it  held  that  the  Commission  could  not 
adjust  rates  — in  the  absence  of  express  authority  of  Congress. 
The  court  ruled  also  that  the  Commission  had  no  authority  even 
to  decide  the  relative  reasonableness  of  charges  between  different 
cities  —  thus  killing  the  long-and-short-haul  section.  By  this 
time  the  Commission  was  well  stripped  of  power;  but  a  series  of 
congressional  acts  effectively  restored  its  authority.  In  1906 
it  received  definite  power  to  determine  and  prescribe  reasonable 
rates,  the  burden  of  proof  on  appeal  being  upon  the  carriers. 
Free  passes  were  prohibited  and  railroads  were  forced  to  give  up 
other  lines  of  business  like  mining.  In  1910  the  Commission  was 
authorized  to  suspend  new  rates  of  carriers,  pending  investigation. 
Then  the  long-and-short-haul  section  was  restored  to  effective- 
ness. Jurisdiction  was  extended  over  pipe-line,  telephone  and 
telegraph,  cable  and  power-transmission  companies. 

This  is  not  all  of  the  legislation  affecting  the  Interstate  Com- 
merce Commission.  The  enforcement  of  the  Railway  Safety- 
Appliances  Act  of  1893  was  given  to  it,  and  it  was  charged  with 
the  investigation  of  accidents.  The  inspection  of  all  locomotive 
boilers  has  been  added. 

The  Railway  is  a  Service-type  Utility.  —  A  moment's  con- 
sideration shows  that  while  the  railways  handle  products  they 
themselves  are  only  giving  a  service,  as  are  electricity-supply  or 
telephone  concerns.  One  test  of  this  is  their  peak  loads  and 
their  inability  to  manufacture  or  acquire  the  essential  elements 
of  their  service  in  times  of  light  demands.  Passengers  require 


168  PUBLIC  UTILITY  RATES 

to  be  carried  when  they  present  themselves.  They  can  effect 
little  adjustment  to  off-peak  loads  —  they  want  to  travel  on  holi- 
days, days  of  college  games,  etc.,  and  must  all  be  carried  at  once 
or  not  at  all.  For  instance  *  in  Nov.  13,  1915,  at  the  time  of  a 
Yale-Princeton  football  game  in  New  Haven,  20,232  passengers 
were  taken  into  New  Haven  during  four  hours;  13,277  came  from 
New  York  City  and  6950  from  Boston  and  other  points,  all  in 
22  regular  and  23  special  trains.  When  the  tide  turned,  19,678 
passengers  were  carried  out  in  two  hours  by  22  regular  and  20 
special  trains. 

Thousands  of  workers  in  urban  districts  must  be  taken  from 
suburban  districts  in  two  early  morning  hours  and  carried  back 
in  three  evening  hours,  with  comparatively  light  travel  at  other 
hours.  Crops  have  to  be  moved  to  the  markets  quickly  if  at  all. 

There  is  a  slight,  almost  inappreciable,  storage  capacity  given 
to  railway  lines  by  their  receiving  depots,  but  freights  cannot  be 
allowed  to  congest  at  a  shipping  transfer  or  delivery  points 
beyond  a  certain  minimum,  or  else  the  service  is  retarded,  if 
not  finally  stalled.  After  the  slight  storage  capacity  of  terminals 
is  once  reached,  extreme  steps  have  to  be  taken  to  prevent  the 
receipt  of  freight  —  even  embargoes  are  declared  by  the  roads, 
as  in  1907  and  1915. 

Difficulty  of  Applying  "  Cost  of  Service  "  to  Rates.  —  Even 
in  the  local  utilities  where  the  different  kinds  of  service  and 
classes  of  customers  are  comparatively  few,  the  exact  proper 
apportionment  of  costs  as  fixed  charges  and  operating  expenses 
is  not  very  easy.  In  railway  transportation,  where  the  kinds  of 
service  —  local,  joint-route,  long-haul,  short-haul,  fast-freight, 
slow-freight,  flat-car,  coal-car,  refrigerator-car,  heater-car,  regu- 
lar passenger,  excursion-trip,  commuting,  etc.  —  mount  up  to 
the  dozens  and  the  groups  of  shippers  run  into  the  hundreds  (for 
there  are  now  some  85,000  separate  tariffs  in  force  on  American 
railways,  and  that  is  a  forced  reduction  from  over  220,000  in 
1907  f)  the  difficulties  of  logically  determining  the  costs  of  each 
service  are  obvious.  Where  a  few  allocations  of  joint  expenses 
have  been  made  the  apportionment  has  been  partly  by  judgment. 
When  the  study  of  railway  costs  is  carried  out,  a  survey  on  dif- 
ferent lines  is  needed  from  that  used  on  local  utilities;  the  aim 

*  See  Engineering  News,  Nov.  18,  1915,  p.  1005. 

t  For  details  see  "  Railroad  Rates  and  Regulations,"  W.  Z.  Ripley,  1912. 


PROBLEMS  OF  RAILWAY  RATES  169 

is  to  find  terminal  expense  and  carriage  expense  for  each  service. 
In  each  of  these  expenses  of  course  both  fixed  and  operating  costs 
enter. 

It  is  a  common  assumption  of  railway  men  that  terminal  costs 
—  loading  and  unloading  —  cost  50  £  per  ton  on  the  average  and 
that  \i  per  ton  mile  is  a  good  guess  at  cost  of  haulage,  the  com- 
bination of  the  two  factors  resulting  in  the  cost  rising  less  rapidly 
than  the  distance.  But  such  a  charge  for  service  could  be  suc- 
cessfully applied  under  existing  commercial  conditions  only  as  a 
basis  of  departure  —  modifications  being  made  above  or  below 
to  accord  with  the  value  of  the  product,  competition  of  water 
routes  and  other  rail  lines,  and  all  the  points  exemplified  later  in 
the  citations  of  actual  cases. 

Expenses  Independent  of  Traffic.  —  Railway  and  commission 
statisticians  seem  to  agree  that  about  two-thirds  of  a  road's 
annual  expenditures  are  nearly  or  quite  independent  of  traffic  — 
they  would  continue  if  traffic  dropped  nearly  to  zero.  It  is 
generally  estimated  that  one-third  of  the  annual  expense  covers 
fixed  charges  on  investment  —  interest  and  retirance  —  and  a 
third  goes  into  maintenance  of  way,  of  structures  and  of  rolling 
stock,  into  operating  the  trains  (empty  or  loaded)  and  for  paying 
for  the  general  administration.  That  leaves  only  a  third  to  rise 
and  fall  closely  with  the  tide  of  shipments  and  travel. 

It  may  be  argued  that  interest  .depends  on  amount  of  equip- 
ment and  that  in  turn  on  traffic.  That  is  not  true,  however, 
in  considering  a  road  with  given  equipment  and  fluctuating 
traffic  —  the  common  situation.  Deterioration  of  structures 
and  roadbed  on  the  whole  is  caused  by  weather  far  more  than  by 
wear  and  tear  of  traffic,  though  in  special  situations  that  may  not 
be  true.  Deterioration  of  rolling  stock  alone  depends  mostly  on 
the  amount  of  its  use  —  but  even  here,  in  times  of  idleness,  there 
is  a  depreciation  due  to  the  attack  of  weather.  Maintenance  of 
the  roadbed,  structures  and  rolling  stock  is  affected  by,  or  is  in- 
dependent of,  traffic  in  much  the  same  way  as  is  deterioration. 
Sometimes  added  tracks  are  required  to  take  slow  traffic  off  con- 
gested high-speed  tracks  to  prevent  congestion  of  service.  Then 
the  new  construction  may  not  be  self-supporting  for  the  traffic 
over  it,  but  the  improvement  in  the  capacity  of  the  older  tracks 
would  more  than  compensate. 

Thus  the  more  the  railway  service  is  studied  the  more  it  is 


170  PUBLIC  UTILITY  RATES 

seen  how,  even  with  the  ideal  condition  of  traffic  of  a  single  uni- 
form quantity  and  quality  day  by  day,  it  has  been  very  difficult 
to  arrange  convincingly  all  the  expenses  according  to  (1)  amount 
of  equipment  required  by  a  given  service,  (2)  the  operating  cost 
of  haulage,  (3)  the  proportionate  use  of  terminal  facilities  by  a 
given  service  and  (4)  the  proportion  of  overhead  charges  for 
management.  Add  the  complications  of  dividing  the  cost  of 
tracks,  yards,  terminals,  and  rolling  stock  between  freight  and 
passenger  service  (and  this  has  been  seriously  tried  by  railroads 
and  commissions  but  more  often  with  inconsistent  and  sometimes 
absurd  results  which  sprung  from  the  highly  arbitrary  assump- 
tions which  had  to  be  made)  and  an  idea  of  the  incomplete  re- 
liability of  the  results  begins  to  be  gained.  Further,  take  the 
amounts  assessed  as  the  cost  of  the  freight  business  and  try  to 
split  it  up  for  shipments  of  coal,  stone,  timber,  fruits,  meats, 
groceries,  machinery,  wagons,  clothing,  ores,  explosives,  oils, 
beverages,  medicines,  and  what  not,  and  the  immensity  of  the 
problems  of  scientific  rates  are  realized.  (There  has  been  of  late, 
howe.ver,  a  revival  of  confidence  in  the  possibility  of  a  limited 
segregation  of  costs,  as  noted  later.) 

"  Law  of  Joint  Costs."  —  The  inter-dependence  of  costs 
already  mentioned  is  an  exhibition  of  what  economists  have  long 
called  the  "  Law  of  Joint  Costs."  It  means,  translated  into  the 
terms  of  this  case,  that  so  many  of  the  expenditures  are  un- 
affected by  the  presence  or  absence  of  traffic  and  are  so  inevitable 
if  the  road  is  to  be  operated  at  all,  that  no  apportionment  is 
wholly  rational.  Then,  it  is  argued  by  many,  rates  have  to 
be  adjusted  to  what  the  shippers  are  willing  to  pay  —  modified 
by  the  provision  that  always  the  rate  system  as  a  whole  must 
yield  a  "  reasonable  return  on  the  fair  value  of  the  property  used 
and  useful,"  if  the  road  is  to  live  and  grow. 

There  is,  finally,  a  crucial  test  for  a  value-of -service  rate  — 
will  it  upset  an  existing  equilibrium  of  traffic?  Will  it  throttle 
transportation  so  that  the  net  result  is  loss  of  revenue,  or  will  it 
boom  a  carrier's  business.  This  is  solely  a  question  of  record, 
experience  and  judgment,  except  perhaps  as  to  those  vital  living 
supplies  which  must  flow  unabated  anyway  —  coal,  grain,  and 
salt  for  instance. 

"  Law  of  Increasing  Returns."  —  The  economists'  "  Law  of 
Increasing  Returns  "  has  been  much  discussed  by  writers  on 


PROBLEMS  OF  RAILWAY  RATES  171 

railway  problems.  But  it  is  essentially  the  same  action  seen  in 
local-utility  operation,  though  it  is  little  spoken  of  there  under 
its  formal  and  formidable  title.  The  "  law  "  may  be  stated  in 
two  ways:  (1)  The  operating  cost  of  an  utility  does  not  go  up  as 
rapidly  as  the  volume  of  business;  (2)  the  unit  cost  of  service 
decreases  and  the  profits  increase,  under  fixed  rates,  as  the 
volume  increases.  » 

The  first  statement  emphasizes  an  effect  evidently  more  pro- 
nounced in  railway  operation  than  with  local  utilities.  It  is 
more  heard  of  in  railway  problems  because  of  the  lack  of  control 
over  it.  Each  hundredweight  of  freight  added  to  a  partly  loaded 
car  adds  less  to  cost  of  haul  than  a  hundredweight  of  the  original 
load.  Each  car  added  to  a  train,  up  to  the  capacity  of  the  loco- 
motive, costs  less  to  transport  than  one  of  the  cars  first  coupled. 

Similarly,  in  an  electric  central  station  all  the  extra  energy 
furnished  by  an  underloaded  generator  costs  less  per  unit  than 
the  output  before  the  increase.  But  the  local  electric  station, 
however,  may  adjust  its  rates  to  the  unit  cost  under  full-capacity 
output,  and  failure  to  earn  its  legitimate  return  is  but  a  temporary 
loss  as  this  may  go  into  the  cost  of  developing  the  business  and 
affect  the  rates.  Not  so  the  railroad;  the  rates  so  far  have  been 
generally  fixed  by  considerations  beyond  the  absolute  cost  of 
service.  If  the  legitimate  return  on  the  investment  as  a  whole 
is  not  earned  still  the  roads  cannot  easily  raise  the  rates  for  fear 
of  discouraging  traffic.  It  does  them  little  good  to  throw  defi- 
cits into  intangible  property  value  (such  as  "  business-develop- 
ment investment  ")  so  long  as  cost  of  service  is  not  the  accepted 
criterion  of  railway  rates. 

The  alternative  is  always  to  secure  the  maximum  amount  of 
traffic  which  can  be  handled  and  this  explains  the  time-honored 
struggle  of  all  roads  for  more  business.  Traffic  is  carried  on  night 
and  day;  cars  and  engines  are  worked  intensively;  trains  are 
spaced  as  close  together  as  safety  permits.  American  traffic 
officials  have  always  sought  to  develop  business  to  keep  up  this 
rush;  they  have  taken  new  traffic  at  a  small  profit  above  the 
bare  increment  in  cost  brought  by  the  added  traffic,  and  it  is  only 
when  fresh  competition  between  localities  and  industries  is 
kindled  that  serious  contention  has  arisen  —  such  as  has  been 
seen  over  the  cheap  transportation  of  Pacific  Coast  fruit  into  the 
markets  of  Southern  and  Eastern  growers. 


172  PUBLIC  UTILITY  RATES 

Renewing  Separation  of  Operating  Expenses.  —  From  1888 
to  1893  the  separation  of  operating  expenses  was  required  by  the 
Interstate  Commerce  Commission  in  the  reports  demanded  of 
carriers.  At  that  time  expenses  not  directly  chargeable  to 
freight  or  passenger  traffic  were  divided  on  a  basis  of  propor- 
tionate train  mileage.  In  1894  the  practice  was  discontinued 
owing  to  the  few  directly  assignable  items  and  the  uselessness 
of  the  train-mileage  derivatives.  By  1913,  however,  the  Com- 
mission became  convinced  that  sufficient  progress  in  railway 
accounting  had  been  made  to  make  the  separation  serviceable. 
Some  roads  were  already  making  it  —  perhaps  somewhat  arbi- 
trarily —  in  studying  efficiency  of  operation.  It  was  judged 
possible  to  separate  two-thirds  of  the  operating  expenses  satis- 
factorily, the  remainder  being  divided  on  some  basis  which 
measured  the  use  which  either  service  makes  of  common  facili- 
ties. The  general  and  long-term  statistics  of  separated  expenses 
were  held  to  be  much  more  reliable  in  rate  cases  than  any  special 
short-time  studies  made  for  specific  cases. 

In  the  testimony  taken  at  hearings  on  Advances  in  Rates  — 
Western  Case  (20  I.  C.  C.  307),  one  railroad  official  testified  that 
some  51%  of  operating  costs  could  be  directly  apportioned,  29% 
divided  with  practical  accuracy  and  20%  arbitrarily  placed; 
this  was  interpreted  to  show  that  a  statistician's  estimate  of  ser- 
vice cost  would  be  within  5%  of  actual.  The  practice  on  the 
Burlington  and  Santa  Fe  lines  was  concretely  cited. 

After  conferences  the  Commission's  scheme  of  division  was 
approved  by  ijie  railroads  and  the  Commission  issued  governing 
rules.  The  only  disagreement  seemed  to  be  as  to  whether  main- 
tenance of  way  and  structures  should  be  divided  in  proportion 
to  "  engine-ton-miles "  or  "  gross-ton-miles."  Both  schemes 
are  being  tried  out.  The  reported  separations  are  according 
(a)  solely  to  freight  service,  (6)  solely  to  passenger  or  allied 
services  (baggage,  mail  and  express),  (c)  in  common  to  freight 
and  passenger  services,  (d)  to  neither  service. 

It  is  of  interest  to  note  briefly  how  some  of  the  items  are  ap- 
portioned. Thus  in  maintenance  of  way  and  structures  only 
cost  of  superintendence,  upkeep  of  roadway  buildings,  paving 
and  roadway  machines,  a  part  of  track  work,  and  shops  and 
engine  houses,  are  reported  common  and  undivided.  Mainte- 
nance of  yard  tracks  is  segregated  by  record  or  estimate  and  joint 


PROBLEMS  OF  RAILWAY  RATES  173 

costs  are  apportioned  according  to  switching  locomotive  miles. 
Expenditures  on  station  and  office  buildings,  grain  elevators, 
storage  warehouses,  power  plants,  and  injuries  to  persons  are 
divided  according  to  the  facts.  Expense  of  signals,  interlocking 
plants,  telephones  and  telegraphs  are  apportioned  on  a  basis  of 
transportation  train  miles.  Water  and  fuel  stations  are  divided 
in  proportion  to  the  division  of  engine  fuel. 

Under  maintenance  of  equipment,  only  the  cost  of  keeping  up 
work-train  equipment  is  undivided.  Expense  on  locomotives  is 
placed  directly  as  for  freight  or  passengers  or  divided  according 
to  the  locomotive-ton-miles  given  in  each  service.  Expenses 
on  car  equipment,  of  course,  can  be  assigned  directly.  The 
other  items  like  cost  of  superintendence,  shop  machinery,  power 
plants,  floating  and  miscellaneous  equipment,  and  injuries  to 
persons  are  apportioned  according  to  the  freight  and  passenger 
proportions  of  the  aggregate  of  the  primary  accounts  mentioned. 

The  expenses  of  getting  business  (Group  III,  Interstate  Com- 
merce Commission  Accounts)  are  assigned  directly  where  possible 
and  the  remainder  divided  in  proportion  to  the  aggregate  of 
directly  assigned  items. 

Under  the  rail-transportation  group  of  operating  expenses, 
train  labor,  fuel,  water,  lubricant  and  supplies  are  assigned 
directly  as  far  as  possible;  for  mixed  trains  these  items  are  divided 
on  a  basis  of  car  miles  in  each  service.  Yard  labor,  fuel,  sup- 
plies, etc.,  are  assigned  directly  or  divided  in  accordance  with 
the  switch-engine-miles  in  each  service.  Cost  of  dispatching 
trains,  signal  operation  and  crqssing  protection  is  apportioned 
on  a  basis  of  the  transportation  train  miles  (or  by  special  study) ; 
mixed-train  costs  are  divided  on  the  basis  of  car  miles.  Engine- 
house  expenses  are  split  according  to  the  number  of  engines 
handled  for  each  service,  with  an  arbitrary  multiplier  for  engines 
hard  to  handle.  Cost  of  weighing,  inspection  and  demurrage 
bureaus,  of  coal  and  ore  wharves,  express  and  sleeping-car  serv- 
ice, clearing  wrecks,  damage  to  property,  lost  or  damaged  freight, 
lost  or  damaged  baggage,  injuries  to  persons,  etc.,  are  assigned 
directly.  Most  other  items  like  superintendence,  station  em- 
ployees (in  part),  drawbridge  operation,  telegraphs  and  tele- 
phones, floating  equipment,  stationery,  insurance,  etc.,  are 
divided  in  proportion  to  the  aggregate  of  the  divided  primary 
accounts  of  this  group  already  mentioned. 


174  PUBLIC  UTILITY  RATES 

How  Freight  Charges  are  Figured.  —  A  local  railway  agent 
settling  with  a  shipper  ordinarily  computes  a  two-part  charge. 
From  the  "  classification  sheets  "  furnished  the  agent,  is  found 
the  class  (1,  2,  3,  4,  etc.)  in  which  fall  the  goods  shipped.  From 
the  "  tariff-sheets "  are  taken  the  lawful  charges  per  hundred- 
weight for  this  class  between  the  shipping  point  and  destination 
over  the  route  specified.  The  actual  weight  multiplied  by  this 
tariff  gives  the  charges  to  be  imposed  —  unless  there  are  extras 
for  storage,  switching  (on  carload  shipments),  transfer,  lighter- 
age, refrigeration,  etc. 

Classification  of  Freight.  —  In  the  classification  sheets,  men- 
tioned above,  all  possible  articles  are  put  into  various  numbered 
classes  depending  on  value,  bulkiness,  quantity,  risk  of  damage, 
similarity  to  previously  classified  items  and  the  relative  cost  of 
carriage.  Prof.  W.  Z.  Ripley  has  very  aptly  described  *  the 
classification  sheets: 

Imagine  the  Encyclopedia  Brittanica,  a  Chicago  mail-order  catalog  and 
a  U.  S.  protective  tariff  law  blended  in  a  single  volume.  .  .  .  Such  a  classi- 
fication is  first  of  all  a  list  of  every  possible  commodity  which  may  move 
by  rail,  from  Academy  or  Artists'  Board  and  Accoutrements.to  Xylophones 
and  Zylonite.  In  this  list  one  finds  Algarorilla,  Bagasse,  Pie  Crust  — 
Prepared,  Artificial  Hams,  Cattle  Tails  and  Wombat  Skins;  Wings, 
Crutches,  Cradles,  Baby  Jumpers  and  all;  together  with  Shoo  Flies  and 
Grave  Vaults.  Everything  above,  on  or  under  the  earth  will  be  found 
listed  in  such  a  volume. 

There  are  three  important  groups  of  freight  classifications  in 
the  United  States,  known  as  the  Official,  the  Southern  and  the 
Western,  made  up  by  committees  of  all  the  railways  in  those 
respective  territories.  In  the  Official  Classification  (applying 
to  the  northeastern  quadrant  of  the  country)  there  are  six  regu- 
lar (numbered)  and  three  special  classes;  in  the  Southern  (apply- 
ing to  the  Southeastern  quadrant)  there  are  six  numbered  and 
seven  lettered  classes;  in  the  Western  (applying  in  the  territory 
West  of  the  Mississippi  River)  are  five  numbered,  and  five  lettered 
classes  and  a  few  special  cases  where  the  maximum  class  rating 
has  been  multiplied  or  discounted.  Many  commodities  shipped 
in  carload  lots  (designated  "  C.  L.")  are  given  a  lower  classifi- 
cation than  the  same  commodities  moved  in  less  than  carload 

*  "Railways:  Rates  and  Regulation";  1912,  New  York. 


PROBLEMS  OF  RAILWAY  RATES  175 

lots  ("  L.  C.  L.")-  The  "  exception  sheets  "  going  with  the 
classification  used  by  any  road  show  special  products  given  a 
different  classification  within  a  restricted  locality  because  of 
peculiar  local  conditions. 

Moreover  from  each  important  shipping  point  neither  classi- 
fication sheets  nor  exception  sheets  may  apply  to  certain  com- 
modities since  the  need  of  special  low  rates  (usually  on  the 
coarser  products)  to  cause  movement  has  led  to  the  publication 
of  so-called  commodity  rates,  applying  only  to  specified  locali- 
ties and  products. .  There  seems  to  be  a  general  effort  after  given 
traffic  has  moved  a  few  years  under  commodity  rates  to  substi- 
tute regular  classifications  and  tariffs  but  there  is  great  difficulty 
oftentimes  in  retiring  a  favor  once  granted.  It  is  commonly 
reported  that  as  much  as  75%  of  the  tonnage  of  American  roads 
moves  under  these  exceptional  rates.  Grain,  coal,  oil,  lumber, 
wool,  cotton,  live  stock,  dressed  meats,  and  some  of  the  products 
of  these  staples,  are  the  most  favored  commodities. 

Trunk-Line  Rate  System.  —  The  trunk  roads  in  self -protection 
built  up  a  logical  rate  system  for  traffic  between  the  Middle 
West  and  the  Atlantic  seaboard  which  antedates  by  15  years  the 
Interstate  Commerce  Act  and  embodies,  in  a  general  way,  many 
essentials  of  a  cost-of-service  plan.  This  system  has  not  been 
directly  presented  to  the  shippers  but  exists  back  of  the  tariffs  — 
a  guide  for  railway  officials  (see  Pratt  Lumber  Co.  v.  C.  I.  &  L. 
Ry.,  10  I.  C.  C.  29). 

In  trunk-line  territory  the  charges  for  a  given  locality  are  pro- 
portioned to  the  length  of  haul,  the  shortest  line  from  Chicago 
to  New  York  (920  miles)  being  the  basis.  In  fixing  the  propor- 
tion, to  illustrate,  for  Columbus,  from  the  Chicago  rate,  say  25^ 
per  100  lb.,  the  fixed  charges  on  both  ends  of  the  haul  (6fO  are 
deducted  and  the  remainder  (19^)  reduced  in  proportion  to  the 
reduced  distance  to  New  York  (70%).  The  haul  charge  there- 
fore is  13.3^;  to  this  is  added  the  terminal  charges  to  get  the 
total  rate  19.3^  —  which  is  77.2%  of  the  standard.  This  basis 
was  not  strictly  applied  to  every  intermediate  point;  rather  it 
gave  the  rate  from  points  common  to  two  or  more  carriers,  the 
local  stations  having  to  stand  a  small  arbitrary  addition  to  the 
nearest  common  point,  but  the  long-and-short-haul  prohibition 
being  observed.  One  result  has  been  the  establishment  of  per- 
centage zones  which  have  been  slightly  stretched  here  and  there 


176  PUBLIC  UTILITY  RATES 

to  meet  railway  competition  at  junctions,  by  the  presence  of 
independent  cross  feeder  roads,  and  by  commercial  competition 
between  localities.* 

Zone  Rates  for  Transcontinental  Freight.  —  Of  interest  in 
comparison  with  the  trunk-line  rate  system,  but  not  intimately 
related  to  it,  is  the  system  of  class  and  commodity  tariffs  which 
have  been  evolved  by  the  transcontinental  roads  and  the  Inter- 
state Commerce  Commission  from  1910-1915  in  making  certain 
allowed  exceptions  to  the  long-and-short-haul  provisions  of  the 
revised  Interstate  Commerce  Act. 

For  instance,  a  $3  base  rate  once  prevailed  for  Class  1  goods 
for  the  Pacific  Coast  cities  from  anywhere  in  a  broad  belt  be- 
tween Denver  and  Boston,  but  the  rate  to  the  intermountain 
points  east  of  the  coast  was  this  figure  plus  a  local  back-haul  - 
though  the  freight  was  merely  stopped  off  at  the  proper  point 
on  its  transcontinental  trip.  This  practice  came  under  the 
prohibitions  of  the  long-and-short  haul  and  the  Commission, 
in  e'ffect,  was  asked  to  allow  it  to  continue,  on  the  score  of  water 
competition  through  the  Panama  canal  governing  the  coast 
rates  but  not  the  intermountain.  The  Commission  reaffirmed 
the  principle  but  found  the  difference  too  great  and  the  origin 
zone  too  broad.  So  they  adopted  certain  zones  then  seen  on 
existing  schedules  and  graduated  the  transcontinental  class 
rates  from  New  York,  Buffalo-Pittsburgh,  Cincinnati-Detroit, 
Chicago,  and  from  Denver.  The  intermountain  rates  were  made, 
for  example  in  Class  1  on  shipments  to  Reno  and  points  east  to 
Utah,  $3.50  from  New  York  City,  and  all  the  others  correspond- 
ingly higher  than  the  coast-terminal  rate.  (See  R.  R.  Comm. 
Nev.  v.  S.  P.  Co.,  19  I.  C.  C.  238;  Transcontinental  Rates  From 
Group  I,  28  I.  C.  C.  1.)  The  commodity  rates  were  studied 
separately  from  the  class  rates  and  a  somewhat  similar  system 
of  zones  worked  out  (Commodity  Rates  to  Pacific  Coast,  32  I.  C.  C. 
611).  Zone  1  included  the  states  west  of  Minnesota,  South 
Dakota,  Nebraska,  Kansas,  Missouri,  Arkansas  and  Louisiana; 
but  for  traffic  to  the  Northwest  the  east  line  of  Zone  1  was  drawn 
west  from  Missouri  to  Kansas  and  New  Mexico.  Zone  2  ex- 
tended some  400  miles  to  the  east  of  Zone  1;  Zone  3  had  its 
eastern  line  running  from  Buffalo  and  Pittsburgh  down  the  Ohio 

*  Details  maybe  studied  in  "Railroads:  Rates  and  Regulation,"  by  W.  Z. 
Ripley,  1912. 


PROBLEMS  OF  RAILWAY  RATES  177 

River;  Zone  4  included  the  North  Atlantic  group  and  Zone  5 
the  Southern  and  South  Atlantic  states. 

Higher  rates,  generally,  on  certain  commodities  which  con- 
stituted the  water-borne  Atlantic-Pacific  business  were  allowed 
out  of  Zones  2,  3,  and  4  to  intermediate  points  than  to  the  coast ; 
the  excess  however  was  limited  to  7%  from  Zone  2,  15%  from 
Zone  3,  and  25%  from  Zone  4.  Similar  carload  rates  on  chemi- 
cals, and  metal  products  were  allowed  but  the  excess  was  limited 
to  15,  25  and  35^  per  100  Ib.  from  Zones  2,  3  and  4.  Coal  was 
allowed  to  have  an  excess  of  5  mills  per  ton-mile.  The  arrange- 
ments in  their  entirety  are  not  as  simple  as  here  noted  and  the 
decisions  themselves  must  be  consulted  for  details. 

Southern  Basing-point  System.  —  In  great  contrast  with  the 
trunk-line  rate  system  is  the  so-called  Southern  basing-point 
system.  The  existence  of  this  scheme  depends  on  certain  char- 
acteristics of  the  Southern  carriers  not  pronounced  in  other  parts 
of  the  country.  First  is  the  general  high  level  of  freight  charges 
—  due  both  to  tariffs  and  classification.  A  second  prominent 
difference  is  the  comparatively  sparse  population  in  the  territory 
served  and  the  small  amount  of  local  traffic.  A  third  difference 
is  shown  by  railway  maps  where  the  important  cities  and  towns 
are  seen  to  be  centers  from  which  railways  radiate,  rather  than 
junction  points  on  parallel  trunk  lines  where  cross  lines  are  met. 

Rates  from  the  more  distant  origins  of  traffic  are  made  up  of  a 
through  rate  to  some  of  these  centers,  plus  a  local  to  destination. 
The  basing  points  first  were  historic  trade  centers  at  which  cotton 
and  tobacco  (typically)  could  be  concentrated  for  grading; 
Savannah  and  Montgomery  are  examples  of  old  centers  which 
enjoyed  the  benefits  of  water  competition,  and  here  the  argu- 
ments were  frequently  accepted  about  the  impossibility  of  charg- 
ing minor  towns  as  low  rates  as  were  given  places  where  com- 
petition flourished. 

Other  great  centers  sprang  up  where  no  water  competition 
was  found  but  rival  roads  met.  Finally  the  gateway  idea  was 
extended  by  the  carriers  to  certain  minor  junctions  —  resulting 
in  many  local  discriminations.  There  has  been  experienced  more 
trouble  from  this  third  class  than  from  the  others. 

The  basing  point  system  as  constituted  is  inconsistent  with 
the  distance  basis  so  satisfactorily  employed  in  the  trunk-line 
scheme  and  the  gradual  change  of  basic  characteristics  of  trans- 


178  PUBLIC  UTILITY  RATES 

portation  in  the  South  is  expected  in  many  quarters  to  point  to 
the  eventual  elimination  of  the  plan. 

Early  Interstate  Commerce  Commission  Rates.  —  It  is  of  no 
particular  value  here  to  examine  into  the  basis  of  interstate  rail- 
way rates  before  they  came  under  the  control  of  the  Interstate 
Commerce  Commission.  It  is  of  passing  interest  to  note,  how- 
ever, that  the  interstate  rate  situation  had  become  deadlocked 
and  unresponsive  to  changing  commercial  conditions  (although 
the  situation  in  a  few  states  had  improved).  The  Lincoln  (Neb.) 
Commercial  Club  case  (13  I.  C.  C.  319)  illustrates  this.  Once 
the  general  supplies  for  Lincoln  came  from  east  of  the  Missouri 
River  and  had  rates  greater  than  to  Omaha.  But  with  industrial 
changes,  the  lumber,  coal,  salt,  glass,  sugar,  etc.,  were  produced 
nearer  to  Lincoln  than  to  Omaha  but  rates  could  be  changed  only 
by  unanimous  action  of  the  companies,  and  this  could  not  be 
secured.  Individual  action  would  have  started  a  rate  war. 

The  nearest  approach  to  principles  that  can  be  found  in  early 
railway  tariff  tinkering  (it  hardly  merits  the  term  "  rate  making  ") 
were  necessity  of  securing  traffic  and  general  expediency.  When 
the  newly  created  Interstate  Commerce  Commission  sought  to 
make  order  out  of  the  chaos  which  it  found,  it  was  soon  con- 
fronted with  the  need  of  deciding  whether  the  cost  of  a  given 
service  or  its  value  should  be  the  fundamental  basis.  They 
accepted  the  latter  and  while  there  have  been  notable  departures 
and  modifications  —  especially  toward  the  end  that  a  railroad's 
whole  rate  system  should  give  a  reasonable  return  on  a  fair  value 
of  the  transportation  property  —  yet  the  value-of -service  theory 
still  appears  to  be  the  dominant  factor  considered  by  the  Com- 
mission. The  declaration  of  this  has  been  repeated  at  intervals, 
notably  in  1910  in  the  general  case  of  returned  (rejected)  ship- 
ments which  take  a  low  rate  (19  I.  C.  C.  409). 

The  Interstate  Commission  has  always  apparently  been  a 
little  troubled  in  finding  a  logical  way  of  defining  and  determin- 
ing the  value  of  a  given  specific  service.  Many  of  the  findings 
in  their  own  analysis  palpably  reduce  to  "  what  the  traffic  will 
bear  "  —  being  proportional  to  the  difference  in  prevailing  prices 
at  shipping  and  receiving  points.  This  has  proved  to  be  reason- 
ing in  a  circle  since  the  prices  at  the  receiving  point  are  fixed  by 
prices  at  the  shipping  point  and  the  charges  for  transportation. 
While  the  early  commissioners  may  have  sincerely  believed  that 


PROBLEMS  OF  RAILWAY  RATES  179 

they  were  applying  the  value-of-service  criterion,  yet  a  careful 
study  of  the  important  decisions  *  shows  the  substitution  of  such 
bases  as  relative  values  of  goods  shipped,  relative  risks,  relative 
distances  and  costs  of  carriage,  natural  advantages  of  localities, 
general  public  interest,  maintenance  of  competition  between 
producers,  preservation  of  vested  interests,  etc.  The  Commis- 
sion evidently  realized  that  certain  necessities  of  life  once  made 
to  flow  must  continue  nearly  independent  of  the  price  of  carriage 
so  that  "  value  of  service  "  alone  is  an  undesirable  basis.  It  is 
in  such  cases  where  the  other  standards  were  brought  in,  and 
before  long  they  rivaled  the  fundamental  standard  in  importance. 
In  the  actual  cases  the  employment  of  several  criteria  are  gener- 
ally seen.  A  few  selected  cases  have  been  noted  in  the  following 
paragraphs  to  show  how  railway  freight  rates  have  been  shaped  in 
practice;  the  review  of  cases  is  not  attempted  to  be  complete 
and  especially  in  the  years  1908-1916  are  the  gaps  large,  for  m 
these  years  the  cases  were  mostly  affirmations  of  earlier  work. 

Effect  of  Value  of  Commodity.  —  In  a  variety  of  cases  the 
Interstate  Commission  allowed  a  higher  rate  on  finished  goods 
than  on  raw  materials  or  intermediate  products.  Thus:  wheel- 
hub  blocks  went  cheaper  than  wheels  in  Hurlburt  v.  L.  S.  &  M.  S. 
Ry.  (2  I.  C.  C.  122);  chair  materials  than  chairs,  Murphy,  Wasey 
&  Co.  v.  Wabash  R.  R.  (5  I.  C.  C.  122);  unfinished  furniture  than 
finished,  Potter  Mfg.  Co.  v.  C.  &  G.  T.  Ry.  (5  I.  C.  C.  514); 
lumber  products  than  lumber,  Eastern  Wheel  Mfg.  Assoc.  v.  A. 
&  V.  Ry.  (27  I.  C.  C.  370);  hatters'  fur  than  hats,  Myer  v. 
'C.  C.  C.  &  St.  L.  Ry.  (9  I.  C.  C.  78);  live  stock  than  packing- 
house products,  Chicago  Board  of  Trade  v.  C.  &  A.  R.  R.  (4 
I.  C.  C.  153);  Chicago  Live  Stock  Ex.  v.  C.  &  G.  W.  Ry.  (10 
I.  C.  6.  428);  Sinclair  &  Co.  v.  C.  M.  &  St.  P.  R.  R.  (21  I.  C.  C. 
490);  grain  than  live  stock,  Grain  Shippers  'Assoc.  v.  I.  C.  R.  R. 
(8  I.  C.  C.  158);  cotton  waste  than  cotton  goods  (12  I.  C.  C. 
388;  22  I.  C.  C.  293);  cotton  seed  than  its  products  (20  I.  C.  C. 
37) ;  salt  in  bulk  than  salt  in  packages,  Gottron  v.  G.  &  W.  R.  R. 
(28  I.  C.  C.  38). 

This  idea  has  been  a  straightforward  proposition  generally 
acceptable  to  shippers.  Oftentimes  cost  of  service  has  indi- 

*  Such  as  may  be  found  in  "Railway  Rate  Theories  of  the  Interstate  Com- 
merce Commission"  by  M.  B.  Hammond,  1911,  or  in  the  "B"  Appendices  to 
the  annual  reports  of  the  Interstate  Commerce  Commission  to  Congress. 


180  PUBLIC  UTILITY  RATES 

rectly  entered  through  consideration  also  of  reduced  risk  and 
care  demanded  for  rough  stocks. 

Effect  of  Market  Price  of  Competing  Products.  —  A  few  cases 
are  on  record  where  competing  or  substitute  products  were  al- 
lowed to  carry  rates  differing  roughly  according  to  general  market 
prices.  For  instance:  soap  powder  and  soap,  J.  Pyle  &  Sons  v. 
E.  T.  V.  G.  Ry  (1  I.  C.  C.  465);  anthracite  and  bituminous  coal, 
Coxe  Bros.  v.  L.  V.  R.  R.  (4  I.  C.  C.  535);  envelopes  and  cheap 
paper  bags,  Wolf  v.  Alleghany  Ry.  (7  I.  C.  C.  40) ;  concrete  and 
steel  vaults,  Van  Camp  B.  V.  Co.  v.  C.  I.  &  L.  Ry.  (12  I.  C.  C. 
79);  wheat  and  corn  (12  I.  C.  C.  418). 

Similar  in  theory  are  several  cases  involving  products  nomi- 
nally not  competing:  Patent  medicines  versus  beers  and  ales, 
Warner  v.  N.  Y.  C.  &  H.  R.  R.  R.  (4  I.  C.  C.  32);  toilet  versus 
laundry  soap,  Andrews  Soap  Co.  v.  P.  C.  &  St.  L.  Ry.  (4  I.  C.  C. 
41);  petroleum  versus  cottonseed  oil,  Rice  v.  C.  W.  &  B.  R.  R. 
(5  L  C.  C.  193). 

Different  tariffs  for  differing  products  of  similar  value  have 
been  disapproved  in  several  cases,  notably:  Ties  and  lumber, 
Reynolds  v.  W.  N.  Y.  &  P.  Ry.  (1  I.  C.  C.  393);  raisins  and  other 
dried  fruits,  Martin  v.  S.  P.  Co.  (2  I.  C.  C.  1);  celery  and  other 
green  produce,  Tecumseh  C.  Co.  v.  J.  &  M.  Ry.  (5  I.  C.  C.  663). 

Closely  connected  with  the  idea  of  market  value  of  products 
is  the  quality  of  use  for  them.  Where  transportation  places 
goods  for  high-value  service,  higher  rates  have  been  allowed  than 
for  similar  carriage  of  goods  intended  for  low-value  utilization. 
For  instance:  cow  peas  as  fodder  instead  of  fertilizer,  Swaffield 
v.  A.  C.  L.  R.  R.  (10  I.  C.  C.  281);  electrical  equipment  as 
scientific  apparatus  or  mechanic  appliances,  Scheidel  v.  C.  & 
N.  W.  Ry.  (11  L  C.  C.  532). 

Changing  tariffs  to"  agree  with  considerable  changes  of  market 
prices  (of  the  coarser  materials  in  general  demand)  have  been 
sanctioned  on  the  excuse  of  public  benefit.  One  case  covered 
hay,  Nat.  Hay  Assoc.  v.  L.  S.  &  M.  S.  Ry.  (9  I.  C.  C.  264); 
others  concerned  iron  and  steel,  Colo.  Fuel  &  Iron  Co.  v.  S.  P.  Co. 
(6  I.  C.  C.  488),  Proposed  Advances  in  Freight  Rates  (9  I.  C.  C. 
382);  still  others  involved  grains,  Alleged  Excessive  Rates  on 
Food  Products  (4  I.  C.  C.  48),  Evans  v.  U.  P.  Ry.  (6  I.  C.  C. 
520),  Delaware  Grange  v.  N.  Y.,  P.  &  N.  R.  R.  (4  I.  C.  C.  588). 

It  should  be  noted  that  in  1914  the  Interstate  Commission  de- 


PROBLEMS  OF  RAILWAY  RATES  181 

clared  (Bd.  R.  R.  Comm.  Montana  v.  B.  A.  &  P.  Ry.  —  31 1.  C.  C. 
641)  that  unreasonableness  of  rates  (on  grain)  could  not  be 
wholly  gaged  by  inability  of  shippers  with  depressed  market 
conditions  profitably  to  market  their  products  under  existing 
rates. 

How  Cost  of  Service  Has  Been  Used.  —  The  opinions  of  the 
Interstate  Commission  make  frequent  reference  to  the  cost  of 
railway  service  but  this  is  seen  to  be  very  largely  in  regard  to 
the  relative  cost  of  two  services  —  which  is  much  more  easy  to 
scrutinize  than  absolute  cost  of  either.  (Indeed  throughout 
the  Interstate  Commission  reports,  it  is  seen  that  in  the  majority 
of  cases  two  rates  are  being  compared  —  one  which  it  is  desired 
to  charge  and  one  which  is  taken  as  a  convenient  standard  for 
comparison.) 

Cost  of  Carrying  Competing  Products.  —  Where  two  services 
have  been  compared  in  studying  the  reasonableness  of  one,  the 
transportation  has  frequently  been  of  what  may  be  termed 
competing  products  such  as  raw  or  finished  materials.  Thus 
there  was  competition  between  live  hogs  and  dressed  pork  for  the 
Eastern  markets  in  Squire  &  Co.  v.  M.  C.  R.  R.  (4  I.  C.  C.  611); 
a  lower  rate  for  hogs  was  allowed  but  largely  on  considerations 
of  cost  (through  value  of  service  entered).  Similar  considera- 
tions were  seen  in  Chicago  Board  of  Trade  v.  C.  &  A.  R.  R.  (4 
I.  C.  C.  153)  and  Chicago  Live  Stock  Exchange  v.  C.  &  G.  W.  Ry. 
(10  I.  C.  C.  428).  Other  cases  involved  strawberries  versus 
potatoes,  Truck  Farmers  Assoc.  v.  N.  E.  R.  R.  of  S.  C.  (6  I.  C.  C. 
295);  peaches  versus  common  freight,  Ga.  Peach  Growers  Assoc. 
v.  A.  C.  L.  R.  R.  (10  I.  C.  C.  255);  lumber  dressed  in  transit 
compared  with  simple  through  shipment,  Farrar  v.  S.  Ry.  (11 
I.  C.  C.  632);  berries  versus  oranges,  Perry  v.  Fla.  C.  R.  R. 
(5  I.  C.  C.  97);  beans  versus  tomatoes,  Rea  v.  M.  &  0.  R.  R. 
(7  I.  C.  C.  43);  corn  products  versus  corn,  Bates  v.  Penn.  R.  R. 
(3 1.  C.  C.  435;  4 1.  C.  C.  281),  Kansas  R.  R.  Comm.  v.A.T.&S. F. 
Ry.  (8  I.  C.  C.-304);  live  stock  compared  with  general  freight, 
Cattle  Raisers  Assoc.  v.  M.  K.  &  T.  Ry.  (11  I.  C.  C.  296). 

Geographical  Comparisons  of  Cost.  —  Relative  cost  of  service 
has  been  deduced  by  the  Interstate  Commission  in  a  few  in- 
stances by  comparing  an  attacked  rate  with  rates  for  similar 
service  elsewhere.  Thus  carriage  of  cotton  from  Meridian,  Miss., 
to  New  Orleans  was  compared  with  shipments  from  Shreveport, 


182  PUBLIC  UTILITY  RATES 

in  N.  0.  Cotton  Exch.  v.  C.  N.  0.  &  T.  P.  Ry.  (2  I.  C.  C.  375); 
wheat  over  a  short  and  a  long  route,  Newland  v.  N.  P.  R.  R.  (6 
I.  C.  C.  131);  cotton  goods  to  Denver  and  to  San  Francisco, 
Kindel  v.  B.  &  A.  R.  R.  (11  I.  C.  C.  495)  (the  last  two  cases  in- 
volved route  competition  also) ;  fruit  in  refrigerator  and  ordinary 
cars,  Waxelbaum  v.  A.  C.  L.  R.  R.  (12  I.  C.  C.  178). 

Under  prevailing  customs  of  making  separate  charges  for  haul 
and  for  refrigeration  on  fruit  shipments,  it  has  been  held  (R.  R. 
Comm.  Calif,  v.  A.  G.  S.  R.  R.,  32  I.  C.  C.  17)  that  a  "  theory 
of  differential  costs  "  should  be  adhered  to  in  judging  of  reason- 
ableness of  charges;  the  refrigeration  charge  should  cover  cost 
of  hauling  the  ice  carried  in  the  car  and  the  extra  cost  of  switching. 

Effect  of  Carload  Lots  on  Cost.  —  The  Interstate  Commission 
has  often  compared  the  cost  of  transporting  goods  in  carload 
and  less-than-carload  lots,  supporting  a  lower  tariff  for  the 
former  because  of  less  labor  in  loading  and  unloading  at  transfer 
points,  a  single  bill  of  lading  and  collection  for  the  whole  carload, 
better  utilization  of  cars,  etc.  Among  the  cases  to  be  noted  is 
an  early  one  involving  oil  in  barrels,  Schofield  v.  L.  S.  &  M.  S. 
Ry.  (2  I.  C.  C.  90);  another  involved  groceries,  Thurber  v. 
N.  Y.  C.  &  H.  R.  R.  R.  (3  I.  C.  C.  473).  The  Interstate  Com- 
mission in  1912  declared  that  where  a  shipper  asked  for  cars  of 
certain  recognized  capacity  and  they  were  not  furnished,  the 
carload  rates  should  be  based  on  requested  capacity.  Lindsay 
Bros.  v.  L.  S.  &  M.  S.  Ry.  (22  I.  C.  C.  516). 

On  mixed  carload  lots  the  rate  and  maximum  charge  applying 
to  the  article  of  highest  rate  prevails  so  as  to  give  the  carrier  the 
earnings  it  might  have  for  an  entire  carload  of  that  commodity; 
Florida  Fruit  and  Veg.  Shippers  Assoc.  v.  A.  C.  L.  R.  R.  (17 
I.  C.  C.  552). 

Effect  of  Distance  on  Cost  of  Transport.  —  The  distance  of 
carriage  obviously  has  some  effect  on  cost  of  service  in  railway 
transportation,  and  therefore  may  be  expected  to  have  been 
considered  in  rate  making.  The  relation  between  distance  and 
cost  of  service  were  discussed  in  early  cases;  Lincoln  B.  of  T.  v.  B. 
&  M.  R.  R.  (2  I.  C.  C.  147);  Farrar  v.  E.  T.  Va.  &  Ga.  Ry. 
(1  I.  C.  C.  480).  Class  rates  from  Sioux  City,  Iowa,  to  points  in 
southwestern  Minnesota  were  reduced  to  equal  those  from  St. 
Paul  and  Minneapolis  for  equal  distances;  Traffic  Bureau  of 
Sioux  City  C.  C.  v.  C.  &  N.  W.  Ry.  (22  I.  C.  C.  110).  Tariffs 


PROBLEMS  OF  RAILWAY  RATES  183 

from  points  on  the  Louisville  &  Nashville  R.  R.  to  Louisville 
were  ordered  to  be  no  higher  than  to  Cairo  for  equal  distances; 
Norman  Lumber  Co.  v.  L.  &  N.  Ry.  (22  I.  C.  C.  239).  Con- 
versely, distance  permitted  larger  rates  on  cotton  from  Texas 
points  to  New  Orleans  than  to  Texas  ports;  Re  Texas  Cotton  and 
Linters  (23  I.  C.  C.  404). 

Equal  or  greater  charges  for  a  shorter  than  a  longer  haul  on 
the  same  line  were  generally  disapproved  for  the  first  years  of  the 
life  of  the  Interstate  Commerce  Commission,  as  shown  in  Re 
Louisville  &  Nashville  R.  R.  (1  I.  C.  C.  31);  Commercial  Club 
of  Omaha  v.  C.  R.  I.  &  P.  Ry.  (7  I.  C.  C.  386).  But  the  Com- 
mission's power  in  this  matter  was  reduced  in  1892  (Osborne  Case 
-  52  Fed.  Rep.  912)  and  practically  lost  by  1897  (Board  of  Trade 
of  Troy  v.  Alabama  Midland  R.  R.,  6  I.  C.  C.  3,  168  U.  S.  144; 
and  the  Chattanooga  Case,  10  I.  C.  C.  Ill,  181  U.  S.  1).  The 
power  of  the  Commission,  however,  was  restored  in  1910  by  a 
revision  of  the  Commerce  Act.  The  Commission  may  expressly 
permit  the  use  of  greater  charges  for  the  longer  haul  in  specific 
"cases;  a  long  list  of  such  permissions  is  given  in  Fourth  Section 
Violations  in  Southeast  (30  I.  C.  C.  153;  32  I.  C.  C.  61),  R.  R. 
Comm.  of  Nev.  v.  S.  P.  Co.  (19  I.  C.  C.  238),  Commodity  Rates  to 
Pacific  Coast  (32  I.  C.  C.  611),  and  others. 

In  making  rates  bear  some  relation  to  length  of  haul,  the 
longer  or  shorter  distances  did  not  have  to  be  over  the  same  line 
necessarily,  as  shown  by  Freight  Bureau  Cincinnati  Cham,  of 
Comm.  v.  C.  N.  0.  &  T.  P.  R.  R.  (7  I.  C.  C.  180)  involving  car- 
riage from  Cincinnati  and  Louisville  to  points  south.  Similarly 
the  service  from  Eau  Claire  and  La  Crosse,  Wis.,  to  the  Missouri 
River  was  covered  in  Eau  Claire  B.  T.  v.  C.  M.  &  St.  P.  R.  R. 
(5  I.  C.  C.  264).  Shipments  from  Great  Falls  and  Pipestone, 
Minn.,  to  Chicago  were  covered  in  Morse  Produce  Co.  v.  C.  M.  & 
St.  P.  Rys.  (12  I.  C.  C.  485). 

Risk  as  a  Factor  in  Rates.  —  A  high  explosive  less  dangerous 
to  handle  than  dynamite  was  afforded  a  generally  lower  rate  (by 
classification)  in  Masurite  Expl.  Co.  v.  P.  &  L.  E.  R.  R.  (13 
I.  C.  C.  405).  In  Va.-Carolina  Chem.  Co.  v.  St.  L.  Swn.  Ry. 
(16  I.  C.  C.  49)  rates  were  lowered  on  fertilizer  as  a  low  grade 
traffic  requiring  "  no  special  service,"  having  less  risk  than  other 
business,  and  also  of  service  as  an  auxiliary  producer  of  other 
traffic. 


184  PUBLIC  UTILITY  RATES 

Sum  of  Locals  Gives  Maximum  Through  Rate.  —  There  are 
repeated  instances  where  the  sum  of  local  rates  has  been  taken 
as  the  maximum  reasonable  amount  which  a  through  rate  may 
be.  This  is  typically  outlined  in  Porter  v.  St.  L.  &  S.  F.  (15 
I.  C.  C.  1),  where  emigrant  outfits  were  involved.  The  same 
idea  was  applied  for  shipments  of  steam  boilers  in  Lindsay  Bros. 
v.  M.  C.  R.  R.  (15  I.  C.  C.  40),  and  Lindsay  Bros.  v.  B.  &  0. 
Swn.  R.  R.  (16  I.  C.  C.  6).  In  this  connection  is  of  interest  the 
case  Laning-  Harris  v.  Mo.  P.  Ry.  (13  I.  C.  C.  154)  wherein  it 
was  held  that  there  could  be  but  one  lawful  rate  for  a  given  ship- 
ment between  two  points  —  the  local  rate  if  on  one  road,  the 
joint  rate  if  on  two  agreeing  roads,  the  sums  of  two  locals  if  on 
two  non-agreeing  roads. 

A  qualification  to  this  principle  was  recorded  by  the  Inter- 
state Commission  in  Humphreys-Goodwin  Co.  v.  Y.  &  M.  R.  R. 
(31  I.  C.  C.  25).  The  fact  that  the  joint  (through)  rate  exceeded 
the  sum  of  intermediates,  it  was  noted,  raised  a  strong  presump- 
tion of  unreasonableness  but  this  could  be  rebutted  by  evidence. 

Federal  Versus  State  Rates.  —  In  1907  the  Interstate  Com- 
merce decided,  in  Hope  Cotton  Oil  Co.  v.  T.  &  P.  Ry.  (12  I.  C.  C. 
265),  that  a  state-made  rate  "  has  no  greater  sanctity  than  a  rate 
established  by  a  railroad  company  "  and  while  entitled  to  re- 
spectful consideration  could  not  be  accepted  in  fixing  an  inter- 
state rate.  The  same  declaration  was  made  in  Saunders  v.  So. 
Ex.  Co.  (18  I.  C.  C.  417),  in  Cobb  v.  No.  P.  Ry.  (20  I.  C.  C.  100) 
and  in  Trier  v.  C.  St.  P.,  M.  &  0.  Ry.  (30  I.  C.  C.  707).  When 
state  rates  are  reduced  the  effect  on  interstate  commerce  must  be 
considered,  reports  the  Interstate  Commission  in  R.  R.  Comm. 
of  La.  v.  St.  L.  Swn.  Ry.  (23  I.  C.  C.  31).  Here  rates  from 
Shreveport,  La.,  to  points  in  eastern  Texas  were  ordered  made 
similar  to  those  from  Dallas  and  Houston,  Tex. 

The  Effect  of  Water  Competition.  —  The  effect  of  the  real  or 
potential  competition  of  water  routes  with  railway  lines  has 
long  been  a  recognized  factor  in  making  freight  rates.  For  in- 
stance sugar  from  San  Francisco  to  Humboldt,  Kan.,  was  given 
30%  higher  rates  than  to  Kansas  City,  in  Lehmann,  Higginson 
&  Co.  v.  S.  P.  Co.  (4  I.  C.  C.  1).  Lower  rates  on  oil  from  Penn- 
sylvania and  Ohio  were  given  the  Standard  Oil  Co.,  than  to  com- 
petitors at  intermediate  points  because  of  water  and  pipe-line 
competition  which  the  Standard  Co.  had  but  the  others  had  not; 


PROBLEMS  OF  RAILWAY  RATES  185 

(Rice  v.  A.  T.  &  S.  F.  R.  R.  4  I.  C.  C.  228).  Lower  rates  to 
Memphis  and  Nashville  than  to  Chattanooga  were  permitted 
because  of  water  competition  (Chattanooga  B.  T.  v.  E.  T.  V.  & 
G.  Ry.,  5  I.  C.  C.  546,  and  Chattanooga  C.  C.  v.  S.  Ry.,  10  I.  C.  C. 
111).  For  the  same  reason  lower  rates  from  the  Mississippi  River 
to  the  Pacific  Coast  were  allowed  in  Spokane  v.  Mo.  P.  Ry.  (15 
I.  C.  C.  376).  Lower  rates  on  flour  from  New  York  City  to 
Boston  than  to  Readville,  eight  miles  nearer,  were  allowed  to 
stand  because  of  the  Boston  water  route  (King  &  Co.  v.  N.  Y., 
N.  H.  &  H.  R.  R.,  4  I.  C.  C.  251).  Brick  machinery  from  Lock- 
land,  Ky.,  to  East  St.  Louis,  111.,  took  a  higher  rate  than  that 
from  more  distant  Louisville  on  the  same  line  (Durham  v.  I.  C. 
R.  R.,  12  I.  C.  C.  37). 

A  recent  declaration  of  the  Interstate  Commission  (1912) 
was  to  the  effect  that  a  road  could  not  discriminate  against  a 
city  unless  transportation  forces  (water  competition)  were 
brought  into  force  in  one  place  and  not  in  another  (Re  S.  P.  Co., 
22  I.  C.  C.  366,  24  I.  C.  C.  34). 

After  the  New  York,  New  Haven  &  Hartford  R.  R.  had  con- 
solidated the  rail  and  water  lines  between  southern  New  England 
and  New  York  City,  a  competing  boat  line  broke  in,  but  the 
other  railroads  would  not  make  joint  rates  with  the  new  concern. 
The  Interstate  Commission  ordered  the  joint  rates  on  grounds  of 
fostering  competition  (Re  Discriminations  against  Enterprise 
Trans.  Co.,  11  I.  C.  C.  587). 

Railway  Route  Competition  Still  Affects  Rates.  —  While  rate 
wars  are  a  thing  of  the  past  and  governmental  regulation  has 
supplanted  destructive  competition,  yet  competition,  real  and 
potential,  has  left  an  indelible  mark.  In  many  cases  where 
"  local  advantages "  have  been  preserved  these  benefits  are 
shown  to  be  the  results  of  competition  in  rail  transportation. 
Roads  have  been  allowed  to  lower  their  rates  to  meet  short-line 
competition  but  the  Interstate  Commerce  Commission  has  main- 
tained that  a  road  cannot  be  compelled  to  do  so,  and  that  a  mere 
reduction  furnishes  no  evidence  of  the  unreasonableness  of  the 
older  rate.  See  Ottumwa  Bridge  Co.  v.  C.  M.  &  St.  P.  Ry.  (14 
I.  C.  C.  125);  Commercial  Coal  Co.  v.  B.  &  0.  R.  R.  (15  I.  C.  C. 
11);  LaSalle  Paper  Co.  v.  Mich.  C.  R.  R.  (16  I.  C.  C.  149). 

An  increase  of  rates  on  lumber  going  from  southern  states  to 
Ohio  River  points,  the  after  effect  of  consolidation,  were  dis- 


186  PUBLIC  UTILITY  RATES 

approved  by  the  Interstate  Commission  because  competition  was 
favored  by  law  and  the  old  rates  were  fixed  by  competition  (Cent. 
Yellow  Pine  Assoc.  v.  I.  C.  R.  R.,  10  I.  C.  C.  505). 

In  some  of  the  early  cases  of  the  Commerce  Commission  rail- 
route  competition  was  held  not  to  be  sufficient  ground  to  warrant 
lesser  charges  for  a  longer  than  for  a  shorter  haul  over  the  same 
line  but  this  was  overruled  by  the  Supreme  Court  in  the  Troy 
Case  (6  I.  C.  C.  3;  168  U.  S.  144)  and  the  Commission's  authority 
was  restored  only  by  special  legislation  in  1910.  Route  com- 
petition has  long  been  recognized  by  the  Supreme  Court  as  one 
of  the  factors  entering  freight  rates,  see  Social  Circle  Case  (162 
U.  S.  184).  Presence  of  water  competition  between  terminals 
has  been  judged  excuse  for  permitting  a  greater  charge  for  a 
shorter  than  a  longer  haul;  Re  Lumber  Rates  from  South  to  Ohio 
River  (25  I.  C.  C.  50)  is  typical  of  the  many  cases  involving  this 
idea. 

Raw  wool  went  50%  cheaper  from  Fort  Wayne,  Ind.,  to  Phila- 
delphia than  in  the  reverse  direction  due  to  competition  for 
steady  traffic  eastbound  which  did  not  exist  westbound  (Weil 
Bros.  v.  P.  R.  R.,  11  I.  C.  C.  627).  Similar  grounds  did  not 
hold  in.  A.  J.  Phillips,  v.  G.  T.  W.  Ry.  (11  I.  C.  C.  659).  Higher 
rates  were  allowed  east  from  Fenton,  Mich.,  to  Winooski,  Vt.,  than 
from  Winooski  to  Detroit  —  owing  to  empty  cars  going  out 
(Phillips  &  Co.  v.  G.  T.  W.  Ry.,  11  I.  C.  C.  659). 

Rates  to  St.  Cloud,  intermediate  between  Duluth  and  St.  Paul, 
were  held  unfair  unless  sharing  in  a  general  reduction  of  the 
through  rate  made  to  compete  with  a  shorter  through  line  ( Tiles- 
ton  Millg.  Co.  v.  N.  P.  Ry.,  8  I.  C.  C.  346). 

In  McLean  Lumber  Co.  v.  L.  &  N.  Ry.  (22  I.  C.  C.  349)  a 
carrier  was  allowed  to  transport  a  shipment  at  a  rate  fixed  for  a 
route  of  a  competitor  specified  by  the  shipper  but  the  competi- 
tor's lower  rate  not  accepted  as  evidence  of  unreasonableness  of 
carrier's  regular  rates. 

Limits  to  Route  Competition.  —  Some  cases  are  to  be  noted 
where  no  particular  natural  advantages  were  evident  but  old 
railway  rates  had  given  a  locality  certain  business  assistance 
which  was  preserved.  Thus  Wilmington,  N.  C.,  was  losing 
jobber's  distribution  business  to  Norfolk  and  Richmond  by 
virtue  of  a  change  in  existing  rates.  The  Interstate  Commission 
restored  the  handicap  (Wilmington  Tariff  Assoc.  v.  C.  P.  &  Va. 


PROBLEMS  OF  RAILWAY  RATES  187 

R.  R.,  9  I.  C.  C.  118).  Yet  in  contrast  there  are  cases  where  the 
advantages  of  trade  centers,  due  to  old  railway  rates,  were  not 
perpetuated,  the  Commission  ruling  that  the  competition  of 
merchants  in  smaller  places  could  not  any  longer  be  shut  out 
by  discriminatory  rates;  see  Payne,  Gardner  v.  L.  &  N.  R.  R. 
(13  I.  C.  C.  638).  Railroads  cannot  longer  adjust  rates  (in 
order  to  increase  revenues)  so  as  to  constrain  shippers  to  send  to 
one  market  on  one  line  rather  than  another  market  off  that  line 
(Milwaukee  C.  C.  v.  C.  R.  I.  &  P.  Ry.,  15  I.  C.  C.  460). 

Competition  of  Seaports.  —  One  of  the  most  important  group- 
ing of  interstate-commerce  cases  that  can  be  made  would  cover 
those  involving  competition  of  seaports,  the  efforts  of  railroads  to 
overcome  peculiar  port  advantages,  and  the  willingness  of  the 
Interstate  Commission  to  foster  such  competition.  Helping  the 
port  of  Boston  to  compete  with  New  York  City  has  already  been 
noted  (Re  Export  Trade  of  Boston,  1  I.  C.  C.  24;  Boston  Cham. 
Comm.  v.  L.  S.  &  M.  S.  Ry.;  1 1.  C.  C.  436).  The  long-discussed 
differentials  on  freight  for  export  in  favor  of  Philadelphia  and 
Baltimore,  and  against  New  York  City,  were  allowed  to  stand  on 
first  examination  as  the  Interstate  Commission  concluded  that 
they  were  the  result  of  the  competition  of  various  carriers  to  get 
a  part  of  the  export  business  and  had  existed  for  forty  odd  years 
without  "  untoward  or  unnatural  influence  on  traffic."  The 
differentials  were  reduced  however  (N.  Y.  Prod.  Ex.  v.  B.  &  0. 
R.  R.,  7  I.  C.  C.  612). 

Lower  rates  on  grain  for  export  than  for  domestic  sale  were 
allowed  after  a  general  study  of  export  rates  because  of  competi- 
tion of  routes  to  foreign  markets,  because  the  Interstate  Com- 
merce Act  was  intended  to  foster  competition,  and  because  the 
Supreme  Court  had  ruled  that  competition  of  carriers  might  be 
reason  for  lower  charges  to  a  distant  than  to  a  nearer  point. 
Export  grain  rates  came  up  again  when  the  trunk  lines  leading  East 
tried  to  justify  a  proposed  increase  from  17|  to  20^  per  100  Ib. 
The  Pennsylvania  and  New  York  Central  roads  had  bought  up 
some  of  the  earlier  competitors  and  believed  that  the  20^  rate 
could  be  returned  to.  The  Commission  did  not  sanction  the 
raise  —  on  the  grounds  that  the  lower  rate  was  not  below  the 
cost  of  service,  had  been  dictated  by  ancient  competition  and 
was  not  unfair  (Proposed  Advances  in  Freight  Rates,  9  I.  C.  C. 
384). 


188  PUBLIC  UTILITY  RATES 

The  same  differencials  came  up  again  in  1904  and  the  figures 
as  reduced  in  1899  were  upheld  on  the  grounds  of  preserving 
competition  between  great  railway  lines  and  ports.  The  dif- 
ferentials for  export,  under  import,  freight  through  Philadelphia, 
Baltimore  and  New  York  City  were  again  adjusted  in  1912 
(Cham.  Comm.  of  N.  Y.  v.  N.  Y.  C.  &  H.  R.  R.  R.,  24  I.  C.  C. 
55).  Newport  News,  Va.,  was  given  old  through  routes  and  joint 
rates,  the  same  as  for  Norfolk  although  the  carrier  lines  did  not 
go  to  Newport  News  (Cham.  Comm.  of  Newport  News  v.  S.  Ry., 
23  I.  C.  C.  345). 

Yet  in  spite  of  allowing  all  these  differentials,  the  Commission 
has  repeatedly  declared  that  "  differentials  diminish  with  in- 
creasing distance  and  vanish  when  the  mileage  on  which  the 
differential  is  based  becomes  inconsiderable  in  proportion  to  the 
total  mileage  from  basing  point  to  destination  "  (Williams  Co.  v. 
V.  S.  &  P.  Ry.,  16  I.  C.  C.  482;  Norman  Lumber  Co.  v.  L.  & 
N.  R.  R.,  29  I.  C.  C.  565). 

Competition  of  Private  Producers.  —  While  the  Interstate 
Commerce  Commission  has  several  times  refused  to  assume  the 
right  to  foster  an  industry,  no  matter  how  desirable  such  action 
might  be,  on  the  grounds  that  it  was  not  a  rule  of  transportation 
(see  Suits  Milling  Co.  v.  C.  &  A.  R.  R.,  15  I.  C.  C.  351),  yet 
there  are  some  cases  closely  approaching  such  action.  For  in- 
stance in  Schumacher  Milling  Co.  v.  C.  R.  I.  &  P.  Ry.  (41.  C.  C. 
373)  carload  rates  applying  to  a  single  grain  were  not  allowed  for 
a  car  of  mixed  grain  when  it  was  shown  that  only  one  producer 
could  ship  mixed  grains  in  such  amounts,  and  that  his  carload 
rate  would  enable  him  to  kill  off  competition.  A  similar  situa- 
tion arose  in  Proctor  &  Gamble  v.  C.  H.  &  D.  Ry.  (9  I.  C.  C.  440) 
where  meat  packers  shipping  a  mixed  carload  of  soap  and  meats 
were  not  allowed  to  secure  the  highest  carload  minimum  tariff 
when  soap  makers  had  to  pay  more.  Local  carload  rates  on 
eggs,  lower  than  on  the  "  less-than  carload  "  tariff,  were  denied 
by  the  Commerce  Commission  on  the  ground  that  it  would 
throw  all  the  egg  business  into  the  hands  of  a  few  great  concerns 
(Brownell  v.  C.  &  C.  M.  R.  R.,  5  I.  C.  C.  638).  This  stand  was 
taken  in  spite  of  a  showing  of  reduced  cost  of  service  for  carload 
shipments.  Similar  cases  were  Paper  Mills  Co.  v.  P.  R.  R.  (12 
I.  C.  C.  438),  and  Milwaukee-Waukesha  Brew'g  Co.  v.  C.  M.  & 
St.  P.  Ry.  (13  I.  C.  C.  28). 


PROBLEMS  OF  RAILWAY  RATES  189 

This  stand  also  contrasts  with  the  general  attitude  of  the  In- 
terstate Commission  that  mixed  carloads  are  to  be  liberally  pro- 
vided for  (Re  Western  Classification,  25  I.  C.  C.  442). 

The  same  disregard  of  cost  of  service  was  shown  in  the  case  of 
Glade  Coal  Co.  v.  B.  &  0.  R.  R.  (10  I.  C.  C.  226),  where  lower 
rates  were  denied  for  coal  loaded  from  a  tipple  than  on  coal 
loaded  from  wagons  or  sleds;  the  Commission  held  that  this  dif- 
ferential would  reduce  the  number  of  shippers  and  shipping  points 
whereas  Congress  intended  that  all  persons  desiring  to  ship  goods 
should  have  a  reasonable  chance. 

The  Commerce  Commission  has  repeatedly  refused  to  blanket 
the  central-creamery  industry  in  order  to  encourage  the  small 
local  creameries;  for  a  typical  example  see  Beatrice  Creamery 
Co.  v.  I.  C.  R.  R.  (15  I.  C.  C.  109).  A  low  rate  on  cotton  goods 
from  Texas  to  Wichita,  Kan.,  was  once  ordered  (equal  to  old 
secret  rates)  so  that  local  jobbers  could  compete  with  Kansas  City 
firms  (Johnston- Larimer  D.  G.  Co.  v.  Wabash  R.  R.,  12  I.  C.  C. 
51).  Other  discriminations  between  Kansas  City  and  Wichita, 
on  mixed-car  rates,  were  removed  in  Wichita  B.  Assoc-  v.  A.  T. 
&  S.  F.  Ry.  (30  I.  C.  C.  374).  One  railroad  was  not  allowed 
arbitrarily  to  charge  more  on  a  product  from  one  mill  on  its  line 
than  others  and  to  prevent  the  one  from  competing  in  certain 
markets  while  assisting  the  others  (Texas  Cement  Plaster  Co.  v. 
St.  L.  &  S.  F.  R.  R.,  12  I.  C.  C.  68). 

Vested  Interests  Protected.  —  Delivery  of  oil  tank  cars  to 
a  Brooklyn,  N.  Y.,  railway  terminal  was  ordered  restored  — 
partly  on  grounds  of  plant  built  up  on  the  old  rates  and  partly  to 
enable  a  competition  of  refiners  (Preston  &  Davis  v.  D.  L.  &  W. 
R.  R.,  12  I.  C.  C.  114).  There  are  various  cases  on  grain  dif- 
ferentials which  have  been  largely  decided  for  the  industries  built 
up  on  them  (Bates  v.  P.  R.  R.,  3  I.  C.  C.  435;  Kaufman  Mill'g 
Co.  v.  Mo.  P.  Ry.,  10  I.  C.  C.  35;  Howard  Mills  Co.  v.  Mo.  P. 
Ry.,  12  I.  C.  C.  258).  A  furniture  concern  which  had  been  given 
special  rates  to  enable  it  to  compete  in  certain  markets,  and 
which  had  therefore  gone  to  much  expense  in  order  to  manufacture 
for  the  new  market,  was  judged  entitled  to  hold  the  rates  spe- 
cially established  (New  Albany  Furn.  Co.  v.  M.  J.  &  K.  C.  R.  R., 
13  I.  C.  C.  594).  This  policy  was  again  declared  in  Green  Bay 
B.  M.  A.  v.  B.  &  0.  R.  R.  (15  I.  C.  C.  59). 

Even  where  the  cost  of  service  gave  rates  above  those  formerly 


190  PUBLIC  UTILITY  RATES 

prevailing,  a  road  was  not  allowed  to  impose  charges  that  would 
destroy  a  business  and  investment  (Mt.  Ice  Co.  v.  D.  L.  &  W.  R.  R., 
15  I.  C.  C.  305).  Splitting  up  single-rate  territory  into  districts, 
with  different  rates  which  resulted  in  loss  of  business  to  concerns 
in  one  district  fostered  by  the  old  rates,  was  disapproved  in  Ind. 
Steel  &  Wire  Co.  v.  C.  M.  &  St.  P.  Ry.  (16  I.  C.  C.  155). 

Some  Rates  Fixed  by  General  Public  Interest.  —  There  are 
many  miscellaneous  cases  where  the  Interstate  Commission's 
"  theories  of  transportation  "  have  been  overridden  for  what  the 
Commission  has  considered  "a  general  public  benefit."  For 
instance  higher  rates  on  Missouri  and  Kansas  flour  going  to 
Texas,  than  on  wheat,  were  allowed  as  they  protected  the  Texas 
milling  industry,  the  existence  of  which  had  a  beneficial  effect  on 
price  of  wheat  in  all  three  states  ( Kaufman  Milling  Co.  v.  Mo.  P. 
Ry.,  4  I.  C.  C.  417;  Wichita  v.  Mo.  P.  Ry.,  10  I.  C.  C.  35). 

In  the  days  before  Los  Angeles  had  grown  down  to  the  sea- 
coast  and  become  a  port,  the  eastern  carriers  were  giving  the 
same  rates  as  enjoyed  by  San  Francisco  —  which  were  fixed  by 
water  competition.  This  preference  over  other  Southern  Cali- 
fornia cities  was  contested  in  Holdzkom  v.  M.  C.  Ry.  (9  I.  C.  C. 
420)  but  was  allowed  to  remain  on  the  excuse  of  creating  lower 
prices  throughout  Southern  California  by  making  Los  Angeles 
the  distributing  center  in  place  of  San  Francisco. 

A  number  of  cases  established,  or  re-established,  joint  routes 
and  rates  "  in  the  public  interest  "  —  not  in  detail  defined.  For 
instance,  regarding  cattle  coming  out  of  Texas,  see  Am.  Nat. 
Live  Stock  Assoc.  v.  T.  &  P.  Ry.  (12  I.  C.  C.  32);  Birmingham 
Packing  Co.  v.  T.  &  P.  Ry.  (12  I.  C.  C.  29).  The  Commission 
has  held,  in  Loup  Creek  Co.  v.  Va.  Ry.  (12  I.  C.  C.  469),  that  a 
through  rate  over  two  or  more  roads  may  be  greater  than  would 
be  reasonable  over  one  road,  and  that  through  routes  and  joint 
rates  are  not  required  in  all  cases  —  only  where  there  will  be 
public  benefit  or  promotion  of  justice.  In  contrast  with  this  is  a 
case  decided  shortly  after,  Cardiff  Coal  Co.  v.  C.  M.  &  St.  P.  Ry. 
(13  I.  C.  C.  460),  .where  it  was  held  that  a  merchant  or  manu- 
facturer having  goods  to  be  moved  and  ready  to  pay  a  reasonable 
rate  is  entitled  to  have  through  routes  and  joint  rates  established 
regardless  of  the  fact  that  his  competition  with  distant  con- 
cerns may  unfavorably  affect  the  revenues  of  the  railroad  in 
question. 


PROBLEMS  OF  RAILWAY  RATES  191 

Rates  not  Allowed  to  Overcome  Natural  Advantages.  —  Lo- 
calities under  a  commercial  handicap  compared  with  more 
favored  places  naturally  employ  every  influence  to  offset  their 
natural  disadvantages,  and,  to  this  end,  discrimination  in  tariffs 
have  been  no  mean  tool.  The  railroad  position  has  been  one  of 
trying  to  equalize  rates  over  all  routes  between  any  two  competing 
points,  so  that  goods  may  move  freely  everywhere  to  market. 
By  this  old  order  of  things  all  products  moved  under  flat  rates 
largely,  irrespective  of  distance.  The  Interstate  Commerce 
Commission,  however,  has  constantly  frowned  on  most  such 
practices  and  endeavored  to  have  installed  more  natural  and 
logical  rates. 

The  natural  advantages,  aside  from  water  routes,  which  are 
preserved  depend  (1)  on  naturally  lower  transportation  costs  or 
shorter  distances  from  one  shipping  locality  than  another  to  the 
same  market,  (2)  on  water-route  competition  and  in  some  in- 
stances all-rail  competition;  or  else  (3)  group,  blanket,  or  zone 
rates  are  involved.  There  has  naturally  been  a  limit  to  the  pro- 
tection afforded  natural  advantages  and  this  appears  to  have 
been  set  so  that  one  locality  could  not  develop  a  trade  monopoly, 
or  so  that  relative  costs  of  service  might  be  followed.  Indeed, 
the  list  of  cases  touching  on  this  point  shows  that  the  "  natural 
advantage  "  idea  is  largely  a  second  aspect  of  the  cost-of -service 
plan.  An  early  case  was  Imperial  Coal  Co.  v.  P.  &  L.  E.  R.  R. 
(2  I.  C.  C.  618).  A  more  recent  case  is  Enterprise  Mfg.  Co.  v. 
Ga.  R.  R.  (12  I.  C.  C.  131  and  451);  low  rates  were  there  denied 
southeastern  cotton  mills  to  San  Francisco  as  the  advantage  of 
water  carriage  from  New  England  was  offset  by  southeastern 
mills'  proximity  of  supply. 

Boston  enjoys  certain  long  standing  concessions  over  New 
York  City  on  western  freight  for  Europe  but  these  differentials 
have  not  been  allowed  on  domestic  traffic  for  which  New  York's 
natural  advantages  are  preserved;  Boston  Chamber  of  Commerce 
v.  L.  E.  &  M.  S.  R.  R.  (1  I.  C.  C.  436).  The  advantage  of  Eau 
Claire,  Wis.,  for  making  lumber  for  Missouri  River  towns,  which 
had  been  overcome  by  rates  favoring  La  Crosse  and  Winona, 
were  restored  in  Eau  Claire  B.  T.  v.  C.  M.  &  St.  P.  Ry.  (5  I.  C.  C. 
264). 

Certain  rates,  of  eastern  and  western  roads  running  to  southern 
markets,  which  had  favored  the  east  for  various  manufactures  and 


192  PUBLIC  UTILITY  RATES 

the  west  for  certain  natural  products  were  changed  so  that  the  man- 
ufacturers in  the  close  Middle  West  might  enjoy  the  advantages 
which  they  had  developed  (Freight  Bureau  of  Cincinnati  v.  C.  N. 
0.  &  T.  P.  Ry.,  Chicago  F.  B.  v.  L.  N.  A.  &  C.  Ry.,  6  I.  C.  C. 
195).  The  advantages  of  Ludington  and  Manistee,  Mich.,  over 
Detroit  in  procuring  salt  for  Missouri  River  points  (advantages 
of  distance,  competing  routes,  and  manufacture)  were  protected 
in  Re  Transportation  of  Salt  (10  I.  C.  C.  148).  Similarly  the 
advantage  of  distance  possessed  by  Kansas  salt  makers,  supplying 
Texas,  over  Michigan  were  protected  by  low  rates  (Anthony  Salt 
Co.  v.  Mo.  P.  Ry.,  5  I.  C.  C.  299). 

Pueblo,  Colo.,  as  a  steel  center  possessed  great  advantages  of 
nearness  to  far  western  markets  and  eastern  steel  rates  were  not 
allowed  to  overcome  the  advantage  (Colo.  F.  &  I.  Co.  v.  S.  P.  Co., 
6  I.  C.  C.  488).  Rates  on  milk  for  New  York  City  from  points 
25  to  335  miles  from  the  city  were  changed  from  flat  to  zone 
basis  for  40,  100,  190,  and  335  miles  out  so  that  nearby  producers 
should  not  be  forced  out  (Milk  Prod.  Prot.  Assoc.  v.  D.  L.  &  W. 
R.  R.,  7  I.  C.  C.  92).  The  Interstate  Commission  refused  to 
make  rates  from  Indianapolis  to  Wisconsin,  Minnesota,  and 
Michigan  points  as  favorable  as  from  Chicago  or  St.  Louis  to 
these  places,  on  the  score  of  shorter  routes,  competition  of  carriers 
and  natural  advantages  of  location  for  Chicago  and  St.  Louis 
(Indianapolis  Freight  Bureau  v.  C.  C.  C.  &  St.  L.,  16  I.  C.  C.  276). 

Equalization  of  advantages  of  milling  in  transit  possessed  by 
Bangor  and  Lewiston,  Me.,  over  Washington  county  towns  was 
not  granted  in  Quimby  v.  Maine  Central  R.  R.  (13  I.  C.  C.  246). 

A  declaration  of  lack  of  power  of  the  Interstate  Commerce 
Commission  "  to  equalize  advantage,  to  place  one  market  in 
competition  with  another,  to  treat  all  railroads  as  part  of  one 
great  whole,"  etc.,  was  seen  recently  (1912)  in  Ashland  Fire  Brick 
Co.  v.  So.  Ry.  (22  I.  C.  C.  115). 

Competition  of  Localities  Fostered.  —  There  are  on  record  a 
number  of  cases  where  the  Interstate  Commission  has  helped 
commercial  competition  between  localities  which  showed  no 
peculiar  advantages  one  over  the  other,  by  removing  railroad 
discrimination.  Thus,  an  arbitrary  charge  of  5^  per  100  Ib.  for 
mills  off  the  line  of  the  Missouri,  Kansas  &  Texas  Ry.  was  held 
unjust  as  prohibiting  the  off  mills  from  selling  along  the  line 
(Blackwell  Millg.  Co.  v.  M.  K.  &  T.  Ry.,  12  I.  C.  C.  23). 


PROBLEMS  OF  RAILWAY  RATES  193 

In  Black  ML  Coal  Land  Co.  v.  So.  Ry.  (15  I.  C.  C.  286)  it  was 
held  that,  where  one  carrier  serves  two  districts  which  by  loca- 
tion, output  and  distance  from  markets  are  under  similar  con- 
ditions, a  carrier  cannot  prefer  one  to  another.  Sioux  City 
petitioned  to  be  put  on  an  equality  with  Omaha,  Kansas  City  and 
Minneapolis  for  purchasing,  milling  and  distributing  grain;  while 
it  was  held  that  certain  competitive  conditions  did  not  prevail  in 
Sioux  City,  as  in  the  other  places,  and  the  full  equalization  could 
not  be  made,  yet  partial  relief  was  granted  by  requiring  more 
reasonable  local  rates  for  collecting  grain  (Sioux  City  T.  E.  Co.  v. 
C.  M.  &  St.  P.  Ry.,  23  I.  C.  C.  98).  Buffalo  millers  were  enabled 
to  continue  in  competition  with  Minneapolis  by  preserving  old 
differences  in  rates  to  New  York  City  and  New  England  (Banner 
Milling  Co.  v.  N.  Y.  C.  &  H.  R.  R.  R.;  13  I.  C.  C.  31). 

There  have  been  a  long  list  of  cases  before  the  commission 
charging  the  effect  of  simple  discrimination  against  one  city  over 
another.  In  general  the  policy  has  been  to  adjust  rates  so  as  to 
equalize  advantages  in  the  absence  of  causes  for  differences  al- 
ready mentioned.  Recent  cases  were  Paducah  B.  T.  v.  I.  C. 
R.  R.  (29  I.  C.  C.  583  and  593);  Re  Tropical  Fruits  From  Gulf 
Ports  (30  I.  C.  C.  621). 

Railway  Passenger  Rates.  —  Greater  simplicity  exists  among 
the  railway  passenger  rates  of  America  than  in  the  freight  rates. 
This  is  only  to  be  expected  because  of  the  comparatively  few 
different  passenger  services  rendered. 

For  years  the  division  of  railway  revenues  has  been  about 
constant  —  in  the  vicinity  of  70%  freight,  25%  passenger  (mail 
and  express),  and  5%  minor  —  the  passenger  revenues  including 
those  from  hauling  parlor  and  sleeping  cars,  etc.  The  average 
revenue  per  passenger  mile  was  2.35^  in  1889,  1.93^  in  1909  and 
1.98^  in  1914.  The  total  travel  was  472,171,000  passengers 
in  1889,  rose  to  891,472,000  in  1909  and  1,053,139,000  in  1914. 
The  passenger  miles  in  the  same  periods  were  11,553,820,445,' 
29,109,323,000  and  35,258,498,000. 

The  classic  rate  is  2jzf  per  passenger  mile  though  lately  there  has 
been  a  widespread  movement  permitted  which  substitutes  1\i. 
For  instance  see  Railroad  Passenger  Rate  Case  (Mass.  P.  S.  C. 
Nos.  805,  673,  and  698  —  1915;  P.  U.  R.  1915  B.  363).  The  2^  or 
2\i  rate  is  intended  to  apply  to  extensive  traveling  and  therefore 
is  effective  through  the  sale  of  coupon  books.  Where  strictly 


194  PUBLIC  UTILITY  RATES 

local  tickets  are  sold  the  rate  may  rise  to  from  3  to  6jzf  per  pas- 
senger mile  depending  on  the  scarcity  of  local  travel,  the  diffi- 
culties of  local  operation,  etc.  It  may  rise  above  6^  under 
extremely  unfavorable  conditions. 

For  example  in  Arkansas  V.M.&  N.  A.  R.  R.  (30  I.  C.  C.  488) 
local  fares  of  6|j£  were  found  reasonable  over  a  mountain  line. 
Mention  should  be  made  of  special-excursion  fares  which  are 
seen  in  seasons  of  light  travel  and  which  are  intended  to  make 
idle  property  produce  some  small  profit.  Special  fares  less  than 
normal  rates  are  permitted  but  cannot  be  required;  and  they 
may  be  accompanied  by  any  lawful  non-discriminatory  regula- 
tions (see  Eschner  v.  Penn.  R.  R.;  18  I.  C.  C.  60). 

Commutation  service  between  residential  districts  and  busi- 
ness centers  needs  special  mention,  since  here  the  rates  are 
phenomenally  low  and  the  service  peculiar.  Many  rates  around 
New  York  City  are  below  0.4^  per  passenger  mile. 

These  passenger  rates  are  for  first  class  travel  —  which  is 
practically  the  only  class  in  America.  There  are  a  few  second- 
class  tickets  sold  but  these  may  be  regarded  as  special  provision 
for  immigrants,  etc.  First-class  travel  is  comfortable,  not  to  say 
luxurious;  second-class  passengers  are  required  to  travel  in  smok- 
ing cars  or  frequently  on  special  trains. 

The  unit  cost  of  travel  is  increased  by  special  services  fur- 
nished many  passengers  —  parlor  and  sleeping  cars,  fast  express 
service  between  important  cities.  But,  with  all  these  additions 
to  the  passenger-rate  system,  all  the  schedules  which  may  be 
found  are  comparatively  few  and  simple. 

It  is  generally  accepted  that  railway  passenger  and  freight 
business  each  should  pay  its  own  way,  though  each  may  not 
contribute  the  same  profit  (see  Bud  v.  C.  M.  &  St.  P.  R.  R.,  1 
W.  R.  R.  Rep.  324;  Five  Per  Cent  Rate  Case,  31  I.  C.  C.  351  and 
32  I.  C.  C.  325).  The  idea  is  difficult  to  apply  on  account  of  the 
difficulty  of  apportioning  large  items  of  expense  —  as  already 
referred  to.  But  apparently  the  Interstate  Commerce  Commis- 
sion hopes  to  make  progress  here. 

Commission  Control  of  Passenger  Fares.  —  The  Wisconsin 
Railroad  Commission  started  out  to  administer  control  of  the 
railway  passenger  service  of  the  state  as  carefully  as  the  freight. 
However  the  legislature  soon  imposed  a  flat  2^  fare  on  the  more 
prosperous  roads  and  all  carriers  accepted  the  change.  That 


PROBLEMS  OF  RAILWAY  RATES  195 

has  relieved  the  Commission  of  passenger  cases  to  a  great  extent. 
The  Interstate  Commerce  Commission  has  had  many  passenger- 
rate  cases  in  the  aggregate  though  the  percentage  would  be  small 
of  the  whole  dockets. 

In  many  ways  there  has  been  merely  a  transference  of  ideas 
expounded  in  freight  cases.  For  instance  discrimination  be- 
tween places  has  been  stopped  as  in  freight  rates;  in  one  typical 
case,  Beach  v.  Ann  Arbor  R.  R.  (26  I.  C.  C.  40),  week-end  excur- 
sion rates  were  required  to  all  resorts  in  a  locality  where  some  were 
favored.  Party  tickets  must  now  be  sold  to  all  applicants  meet- 
ing the  numerical  requirements,  whereas  once  they  were  available 
only  for  theatrical  troupes,  athletic  teams,  etc.  (see  re  Party 
Rate  Tickets,  12  I.  C.  C.  95,  and  Koch  Secret  Service  v.  L.  &  N. 
R.  R.,  131  I.  C.  C.  523).  Commutation  tickets  for  school  chil- 
dren were  similarly  thrown  open  to  all  children  (see  re  Regulations 
Governing  Sale  of  Commutation  Tickets,  17  I.  C.  C.  144). 

Other  examples:  The  federal  disregard  for  state-made  rates  is 
shown  in  passenger  traffic;  in  Arkansas  v.  M.  &  N.  A.  R.  R. 
noted  above,  it  was  held  that  interstate  fares,  of  one  road  higher 
than  another  in  the  same  general  territory  and  higher  than  in- 
trastate  fares  fixed  by  state  laws,  are  not  evidence  of  unreason- 
ableness; the  aggregate  of  intermediate  fares,  fixed  by  state  laws, 
being  less  than  the  through  interstate  fare  is  not  a  violation  of  the 
long-and-short  haul  legislation.  But  where  such  conditions  do 
not  prevail  through  tickets  are  to  cost  no  more  than  the  sum  of 
locals  (see  Kurtz  v.  Penn.  R.  R,;  16  I.  C.  C.  410). 

Route  competition  may  permit  of  advantages  to  one  place 
over  another.  Thus  New  York  has  lower  tariffs  to  the  famous 
resort  Atlantic  City,  N.  J.,  than  has  Baltimore  (M.  and  M.  Assoc. 
of  Baltimore  v.  A.  C.  R.  R.;  23  I.  C.  C.  129). 

Rates  depending  on  value  of  service  given  under  the  same  con- 
ditions and  at  identical  costs  were  made  when  the  prices  of  upper 
berths  in  sleeping  cars  were  cut  to  60%  to  80%  those  of  the 
lowers  —see  Loftus  v.  Pullman  Co.  (18  I.  C.  C.  135;  20 1.  C.  C.  31). 

Appreciation  and  Depreciation  of  Railroad  Property.  —  There 
is  a  certain  peculiar  appreciation  of  railway  track  and  roadbed 
which  can  be  recognized  —  aside  from  the  increments  of  value  of 
real  estate  due  to  general  rises  in  value  of  contiguous  lands.  This 
appreciation  is  variously  known  but  may  well  be  covered  by  what 
has  been  called  "adaptation,  solidification  and  seasoning."  Its 


196  PUBLIC  UTILITY  RATES 

value  is  due  to  its  effect  in  reducing  the  annual  maintenance  ex- 
penses of  unseasoned  and  unsettled  roadbed  and  reducing  the  cost 
of  wear  and  tear  of  trains  passing  over  an  uneven  track.  There  is 
a  small  element  of  value  due  to  the  possibility  of  more  safely  run- 
ning trains  at  higher  speeds.  A  large  part  of  any  solidification 
value  has  been  paid  for  by  heavy  maintenance  expense  in  early 
years  to  compensate  for  settlement  of  fills,  consolidation  of  bal- 
last, etc.  According  to  the  Washington  Railroad  Commission, 
this  appreciation  amounts  to  10%  in  the  first  five  years  (Findings 
of  Fact  in  the  Valuation  of  Railroads,  p.  164). 

Railway  officials  generally  claim  that  there,  is  no  depreciation 
in  a  composite  property  like  a  railroad's  plant.  They  admit  that 
there  may  be  a  certain  depreciation  of  each  of  the  individual 
units  that  make  up  a  road's  property  —  such  as  rails,  ties, 
switches,  cars,  locomotives,  buildings,  bridges,  etc.  —  but  they 
strenuously  and  unitedly  deny  the  existence  of  depreciation  in 
the  aggregation  of  these  individual  items  which  makes  up  the 
working  railroad. 

The  argument  back  of  this  stand  apparently  is  simply  the  old 
one  that  full  capability  of  service  is  present  and  that  the  annual 
maintenance  work  provides  sufficient  annual  renewals  of  the  more 
decrepit  individual  items  of  property  so  that  full  service  ability  or 
efficiency  is  held  to.  The  railways  deny  that  there  is  any  relation 
between  depreciation  and  what  they  call  "  deferred  maintenance  " 
or  "  accrued  deterioration  "  (meaning  what  has  been  termed  in 
this  work  "  retirance  "  or  "  renewance  ")  —  contributions  se- 
cured out  of  earnings  to  offset  increasing  liability  of  property 
having  to  be  taken  out  of  service  and  new  equipment  substituted. 

Outside  of  railway  circles  there  has  not  been  a  ready  accept- 
ance of  the  carriers'  protests  that  their  property  is  the  great 
exception  to  all  other  property  actively  employed  by  man  —  in 
that  it  does  not  depreciate.  It  may  be  that  the  railroad  man's 
attitude  is  influenced  by  his  fear  that  railway  credit  may  be  im- 
paired if  the  usual  deductions  for  depreciation  be  made  in  ascer- 
taining present  value  of  physical  plant. 

Depreciation  and  retirance  do  not  play  nearly  the  important 
part  in  railway  rates  that  they  do  in  other  utility  charges,  since 
the  property  units  are  so  many  and  so  diversified,  and  annual 
maintenance  aggregates  such  a  large  sum  that  there  is  not  much 
unbalancing  of  each  year's  expenses  if  the  renewals  and  replace- 


PROBLEMS  OF  RAILWAY  RATES  197 

ments  are  charged  directly  year  by  year  instead  of  being  equalized 
by  predetermined  annual  payments.  There  is  a  certain  un- 
balance apt  to  occur  in  certain  years,  however,  when  large  and 
expensive  items  like  whole  routes  and  large  structures  are  super- 
seded. In  these  cases  "  expedients  "  are  resorted  to  —  often 
suspense  accounts  are  set  up  or  temporary  reductions  of  surplus 
are  made;  reductions  of  dividend  are  not  to  be  expected  —  if, 
happily,  the  road  is  paying  a  return  and  has  a  surplus. 

There  is  real  ground  for  the  claim  of  railway  officials  that  they 
will  not  be  equitably  dealt  with,  if  their  credit  is  forced  to  depend 
solely  upon  depreciated  value  of  plant  —  seeing  that  railway 
rates  have  not  been  adjusted  to  repay  the  roads  the  capital  lost 
through  depreciation  —  lost  in  the  event  of  official  government 
valuation  result  being  stated  as  depreciatec  cost.  In  such  a 
case  it  would  seem  that  equity  could  be  preserved  by  placing  the 
uncompensated  depreciation  in  the  department  of  business- 
development  expenses,  along  with  any  other  deficits  which  may 
be  fairly  included.  This  subtraction  of  physical  value  and  addi- 
tion to  intangibles  is,  of  course,  only  paying  from  one  pocket  into 
another,  but  it  has  the  great  advantage  that  everything  is  prop- 
erly labeled  and  if  it  ever  becomes  possible  to  amortize  the  in- 
tangible items  their  proper  figure  is  known. 

The  Interstate  Commission  has  made  provision  for  retirance 
(under  the  name  "  depreciation ")  in  its  uniform  accounting 
plans  but  it  has  not  required  the  roads  to  accept  it  to  very  great 
extent.  The  roads  have  not  used  the  strong  claims  that  reside 
in  retirance  for  increased  revenues  and  rates  to  compensate  for 
constant  impairment  of  capital  invested. 

The  Valuation  of  American  Railways.  —  The  difficulty  if  not 
the  impossibility  of  finding  the  real  cost  of  each  individual  service 
performed  by  the  railways  of  the  country  has  not  prevented  a 
keen  desire  to  find  the  value  of  the  several  carriers'  property. 
The  argument  has  been  that  it  was  impossible  to  know  whether 
the  rates  of  a  road  as  a  whole  returned  a  reasonable  percentage  on 
a  fair  value  —  somehow  defined.  It  is  possible  that,  in  the  event 
of  a  valuation  showing  insufficient  earnings,  rates  as  a  whole  might 
be  raised  over  a  given  system  or  territory,  though  any  such  effect 
would  be  expected  to  be  more  or  less  incomplete  owing  to  the 
necessity  of  holding  many  schedules  down  in  order  to  make  cer- 
tain traffic  flow  at  all. 


198  PUBLIC  UTILITY  RATES 

From  its  inception  the  Interstate  Commerce  Commission  has 
advocated  the  making  of  a  general  physical  valuation  of  rail- 
road property,  and  finally  in  1910  Congress  authorized  the  proj- 
ect. The  Act  as  adopted  specifically  called  for  the  detailed 
listing  of  all  railway  property,  the  original  cost  to  date,  cost  of 
reproduction  new,  cost  of  reproduction  less  depreciation,  in- 
tangible elements  of  value,  the  original  costs  and  present  values 
of  lands,  rights  of  way  and  terminals,  cost  of  condemnation, 
damages,  excess  purchase  price,  etc.,  the  original  cost  and  presen- 
tation of  property  held  for  other  than  transportation  service, 
the  history  and  organization  of  the  road,  increases  or  decreases 
of  securities  in  reorganization,  money  received  from  sale  of 
securities  and  expended.  The  valuation  is  required  to  be  detailed 
by  state  areas,  so  that  there  will  be  finally  state  valuations 
making  up  the  federal.  The  best  estimates  that  could  be  made 
at  the  time  the  Act  was  adopted  allowed  five  years  and 
$10,000,000  for  the  task.  But  as  the  organization  of  the  valua- 
tion work  was  completed  the  early  estimates  had  to  be  raised, 
both  in  point  of  time  and  money  to  be  expended.  It  is  now  con- 
fidently predicted  that  the  task  will  be  finished  in  ten  years  after 
it  was  started  (1913-1923)  and  at  a  cost  of  $50,000,000  ($15,- 
000,000  to  the  Commission  and  $35,000,000  to  the  roads).  A 
very  considerable  part  of  this  increase  has  been  due  the  re- 
quirement that  the  original  construction  cost,  etc.,  should  also 
be  established  historically  as  far  as  possible.  In  some  cases  it 
has  been  noted  that  the  cost  of  the  historical  studies  alone  has 
mounted  to  $133  per  mile  of  line. 

Organization  of  the  Federal  Valuation.  —  One  of  the  members 
of  the  Interstate  Commerce  Commission  resigned  to  become 
Director  of  Valuation.  One  of  the  first  steps  was  to  divide  the 
country  into  five  geographical  districts,  and  group  the  organiza- 
tion likewise.  The  appraisal  of  physical  plant,  aside  from  land, 
is  under  five  members  of  an  Engineer  Board,  one  man  for  each 
district.  Under  him  is  a  district  engineer,  and  in  turn  under  the 
latter  one  or  more  senior  field  engineers  who  inventory  only 
track  and  roadway,  a  senior  structural  engineer  having  juris- 
diction over  bridges,  a  senior  architect  for  buildings,  a  senior 
signal  engineer  'for  signals  and  interlocking  plants,  a  senior 
mechanical  engineer  for  rolling  stock  and  equipment,  a  senior  elec- 
trical engineer  for  electrical  apparatus. 


PROBLEMS  OF  RAILWAY  RATES  199 

The  Valuation  Director  has  with  him  also,  besides  counsel,  a 
Supervisor  of  Land  Appraisals,  and  five  land  attorneys  —  each 
in  charge  of  a  district.  There  is  similarly  a  Supervisor  of 
Accounts  and  five  valuation  accountants;  this  bureau  has  the 
investigation  of  history,  organization, -and  financial  arrangements, 
and  the  determination  of  original  cost  to  date.  A  Cost  Bureau 
is  collecting  data  to  make  up  unit  prices  for  applying  to  the  in- 
ventories. The  five  district  land  attorneys  form  a  Land  Board, 
and  the  five  district  accountants  form  an  Accounting  Board  for 
the  country.  There  is  also  a  General  Advisory  Board  of  engi- 
neers, economists,  publicists,  lawyers,  etc.,  which  confers  with  the 
Valuation  Division  on  the  more  important  questions  that  have 
to  be  settled. 

The  valuation  act  requires  the  railways  to  cooperate  in  the 
work  of  valuation  besides  furnishing  information,  maps,  con- 
tracts, reports,  etc.  The  roads  organized  a  "  Railroad  Presi- 
dents' Conference  Committee  "  of  18  members  to  be  the  buffer 
between  the  Valuation  Division  and  the  carriers,  and  this  com- 
mittee in  turn  has  appointed  law,  engineering,  land  and  account- 
ing sub-committees  to  confer  with  the  Valuation  Division. 

The  government  put  out  field  parties  to  make  an  inventory 
of  the  various  railway  properties,  the  roads  furnishing  maps, 
inventories  of  terminals,  etc.  The  federal  parties  were  ac- 
companied by  a  company  "  pilot  "  (a  representative  of  the  road 
who  was  intimately  acquainted  with  the  present  construction, 
history,  etc.,  and  could  point  out  obscure  and  hidden  property 
like  foundations,  subsided  roadbed,  etc.,  and  check  computers). 
After  the  work  was  well  under  way  an  average  accomplishment 
was  the  inventory  of  some  4000  miles  per  month.  As  already 
noted  the  roads  are  necessarily  put  to  great  expense  in  the  aggre- 
gate because  of  the  appraisal.  Valuation  departments  have  been 
created,  records  have  been  assembled  and  in  some  cases  prelimi- 
nary private  inventories  have  been  made  —  all  so  as  to  be  in 
proper  shape  to  cooperate  in  the  government's  studies,  or  to  be 
prepared  to  controvert  any  undesirable  tendencies  shown.* 

*  For  typical  details  of  the  government  and  corporate  activities  necessi- 
tated by  this  valuation  work  see:  "Chicago  &  Northwestern  Ry.  Valuation 
Work."  Engineering  News,  Oct.  28,  1915,  p.  843;  "Railway  Valuation 
Office  System,"  by  H.  J.  Saunders,  Engineering  News,  Nov.  4,  1915;  and  "The 
Federal  Valuation  of  the  Boston  &  Maine  R.  R.,"  by  F.  C.  Shepherd,  Boston 
Society  of  Civil  Engineers,  November,  1915. 


200  PUBLIC  UTILITY  RATES 

Suggested  Economics  in  Railroad  Operation.  —  In  1914  the 
Interstate  Commission  made  a  very  careful  study  of  rates  and 
service  east  of  the  Mississippi  to  judge  of  the  reasonableness  of  a 
flat  5%  increase  in  freight  rates  (Five  Per  Cent  Case;  31  I.  C.  C. 
351;  32  I.  C.  C.  325).  Some  advances  were  allowed  at  first  but 
not  the  scheme  as  a  whole  until  1915.  An  elaborate  presenta- 
tion was  made  of  the  ways  in  which  operating  revenue  could  be 
legitimately  increased  and  expenses  cut  down.  For  instance 
(1)  the  general  increase  of  passenger  fares  in  New  England  was 
cited  and  carriers  urged  to  work  for  repeal  of  low-fare  statutes 
in  the  Middle  West;  (2)  freight-rate  schedules  were  recom- 
mended to  be  overhauled  to  weed  out  many  individual  items 
which  had  become  unremunerative  under  ancient  and  fierce 
competition;  (3)  more  logical  charges  for  special  services,  like 
time  allowances  for  loading  and  unloading,  collecting  and  de- 
livering, storing,  refrigerating,  switching,  lighterage,  etc.;  (4) 
reducing  travel  on  passes  —  which  had  been  shown  to  be  over 
10%  of  total  passenger  travel,  in  spite  of  the  Federal  anti-pass 
laws  —  and  allowing  fewer  free  private-car  services  for  minor 
officials  and  families  of  major  officials;  (5)  intensifying  the  use 
of  freight  cars  which  in  a  typical  case  were  moving  loaded  in 
trains  only  two  days  a  month  and  then  carrying  58%  of  their 
capacity;  (6)  reducing  the  coal  consumption — which  on  one 
road  had  been  cut  9.5%  through  greater  knowledge  and  care  of 
employees;  (7)  greater  effectiveness  of  labor  and  elimination  of 
penalties  for  infraction  of  commerce  laws,  the  latter  aggregating 
$814,000  in  three  years;  (8)  sale  of  property  not  used  in  trans- 
portation service;  (9)  purchasing  supplies  and  contracting  for 
construction  only  from  concerns  in  which  the  officials  of  the 
paying  railroad  have  no  interest;  (10)  revision  of  sleeping-car 
and  railway-mail  contracts. 


CHAPTER  XI 
PROBLEMS   OF  EXPRESS  TRANSPORTATION  RATES 

THE  fast  carriage  of  small  railway  freights,  combined  with 
house  collection  and  delivery,  now  universally  known  in  America 
as  "  express  service "  is  a  peculiar  American  institution  which 
has  grown  up  superimposed  from  the  first  upon  the  regular  rail- 
way services  —  instead  of  being  here,  as  abroad,  developed  as 
an  integral  part  of  the  railways'  business.  The  failure  of  the 
government  early  to  adopt  a  parcel  post  was  an  important  factor 
in  the  growth  of  the  express  companies,  since  for  decades  they 
gave  the  only  means  which  any  shipper  had  of  quick  transfer 
of  goods,  and  were  the  sole  reliance  of  all  who  had  more  than  a 
letter  or  a  paper  or  a  few  ounces  of  merchandise  to  send  away. 
,  The  first  express  service  was  instituted  some  65  years  ago  —  by 
a  messenger  with  a  big  carpet  bag  traveling  between  Boston 
and  New  York  City,  paying  his  regular  railway  fare.  The 
business  has  grown  by  natural  steps  —  and  practically  out  of 
the  profits  of  the  business  —  until  there  are  now  11  concerns 
operating  over  practically  the  entire  mileage  of  railway  line 
in  America.  These  companies  are  the  Adams,  American,  Wells 
Fargo,  National,  Southern,  Great  Northern,  Northern,  West- 
ern, Globe,  Canadian  and  Canadian  Northern.  These  are  by  no 
means  all  the  companies  that  have  flourished  —  they  are  the  suc- 
cessors and  assigns  of  many  smaller  companies,  some  of  which 
bore  the  same  names. 

Relations  of  Express  Companies.  —  While  all  these  are  dis- 
tinctly separate  companies,  and  to  a  certain  extent  are  com- 
petitors, yet  the  strongest  community  of  interest  appears. 
Indeed  the  whole  express  system  has  been  called  a  family  af- 
fair, so  interlocked  is  it  by  the  stock  ownership  of  a  few  persons. 
The  Adams  and  Southern  companies  are  affiliated;  the  National 
is  subsidiary  to  the  American,  and  the  American  is  the  second 
largest  stockholder  in  the  Wells  Fargo.  The  largest  stock- 
holder in  the  United  States  company  (now  out  of  business)  was 

201 


202  PUBLIC  UTILITY  RATES 

also  the  largest  in  the  Wells  Fargo.  Large  stockholders  in  the 
country's  trunk  railways  are  stockholders  and  directors  of  vari- 
ous express  companies.  The  Great  Northern,  Northern  and 
Globe  companies  are  owned  and  controlled  by  the  railways  over 
which  they  principally  operate. 

For  many  years  the  country  was  geographically  divided  among 
the  important  express  companies  and  they  did  not  seriously 
press  beyond  their  limits.  For  instance,  Wells  Fargo  kept  west 
of  the  Mississippi  River  and  the  others  east  —  but  now  in  the 
Central  States  the  Wells  Fargo,  Adams,  and  American  appear  in 
active  competition.  The  Southern  dominates  the  South  from 
Washington  to  New  Orleans,  although  the  American  has  broken 
in.  New  England  is  still  the  home  of  the  American  (and  the 
affiliated  National)  and  the  Adams.  The  Northwest  is  served 
by  the  Great  Northern,  Northern,  Wells  Fargo,  and  Western. 
The  American  company  operates  over  a  central  route  (Union 
Pacific)  to  the  coast,  as  does  the  Globe  (over  the  Denver  &  Rio 
Grande).  Wells  Fargo  reaches  the  Pacific  through  the  South- 
west also,  but  this  territory  has  been  opened  by  all  the  compa- 
nies except  the  Southern  and  those  in  the  Northwest.  The 
Canadian  companies  named  operate  mostly  within  the  Domin- 
ion but  enter  the  states  of  Maine,  New  Hampshire,  Vermont, 
New  York,  Michigan  and  Minnesota  where  Canadian  railway 
lines  operate. 

Worth  of  Express  Companies. — The  property  owned  and  used 
by  the  express  companies  is  worth  somewhat  over  $27,000,000 
including  horses  and  wagons,  motor  trucks,  office  equipment, 
safes,  trunks,  etc.  —  out  of  which  probably  not  more  than 
$1,000,000  represents  original  investment  of  outside  capital. 
The  vital  assets  of  the  companies,  however,  are  the  contracts 
with  the  railways  by  virtue  of  which  the  latter  provide  the  en- 
gines, cars  and  railway  terminals,  and  haul  the  goods  for  the 
express  companies,  which  are  but  an  auxiliary  arm  of  the  rail- 
way service.  These  contracts  have  formed  to  a  considerable 
extent  the  basis  of  capitalization  as  disclosed  by  history.  There 
is  reported  some  $63,500,000  in  stock,  $36,000,000  in  funded 
debt,  and  $59,000,000  in  undivided  profits. 

Recent  Improvements  in  Express  Rates.  — The  whole  fabric 
of  express  rates  was  recast  in  1913  by  the  Interstate  Commerce 
Commission  and  put  into  effect  Feb.  1,  1914.  The  change  put 


PROBLEMS  OF  EXPRESS  TRANSPORTATION  RATES     203 

the  service  on  a  cost-of-service  basis  and  arranged  the  charges 
as  though  all  the  companies  together  formed  one  grand  con- 
cern covering  the  entire  country  with  a  unified  system.  The 
quick  shift  to  cost-of-service  was  feasible  because  the  factors 
causing  departure  from  it  in  the  case  of  railway  freight  tariffs  - 
like  water-route  competition,  protection  of  vested  interests, 
etc.  —  are  of  less  consequence  when  the  size  of  each  shipment 
is  as  small  as  in  express  service,  and  the  number  and  variety 
of  shipments  to  any  one  important  receiver  is  so  large. 

The  Old  Express  Rate  System.  —  Under  the  practices  which 
prevailed  up  to  1914  there  were  two  main  classes  of  express 
shipments:  (1)  "merchandise"  and  (2)  "general-special"  —the 
latter  covering  articles  of  rougher  character  and  smaller  value, 
generally  food  arid  agricultural  products,  which  nevertheless 
needed  to  be  moved  under  express  service  though  they  would 
not  support  the  rates  of  more  valuable  goods. 

The  old  "  merchandise  "  charges  were  proportioned  per  pound 
according  to  a  tariff  for  100-lb.  shipments,  lesser  weights  taking 
higher  graduated  charges  per  pound  when  the  hundredweight 
tariff  was  under  $2.  When  the  base  tariff  was  over  $2  the 
higher  graduated  charges  were  applied  only  to  shipments  of 
less  than  50  Ib.  The  graduations  bore  heavily  on  the  small- 
shipment  business  —  the  pound  rates  for  10  Ib.  running  to  three 
or  four  times  the  pound  rates  on  a  hundredweight.  Multiple 
graduation  was  also  used;  for  over  7-pound  weights  where  there 
was  only  one  company  in  the  place  of  destination  and  two  com- 
panies shared  the  carriage,  the  base  tariffs  were  graduated  before 
addition,  raising  the  final  charge  over  that  from  a  single  gradu- 
ation on  the  aggregate  of  base  tariffs. 

The  express  agent  in  figuring  charges  for  a  customer  had  tariff 
sheets,  giving  the  100-lb.  rate,  and  graduation  tables  giving  the 
actual  charges  for  a  given  weight  and  base  tariff. 

The  "  general-special "  goods  were  billed  by  the  pound  accord- 
ing to  100-lb.  rates  which  were  from  60  to  80%  of  the  merchan- 
dise rate.  A  35^  minimum  charge  was  commonly  imposed, 
though  where  two  companies  had  part  in  the  carriage  each  col- 
lected a  25^  minimum.  Where  a  single  shipment  comprised 
several  packages,  charges  were  on  the  aggregate  where  the 
average  weight  was  over  20  Ib.  Insurance  charges  for  declared 
valuations  of  over  $50  (or  50^  per  Ib.  on  over  100  Ib.)  have 


204  PUBLIC  UTILITY  RATES 

ranged  from  10  to  20f£  per  $100,  according  to  the  tariff  for  car- 
riage. 

Upon  this  simple  base  all  sorts  of  special  schemes  had  be- 
come grafted,  and  these  were  used  for  various  favors  and  dis- 
criminations to  shippers  who  understood  the  loopholes.  Such 
were  the  notorious  "  Sections  A,  D  and  E  "  and  "  Scales  J,  K,  L, 
M,  N,  O  and  Z."  The  three  "  sections  "  were  created  to  meet 
postal  competition.  "  E  "  was  confided  to  manufacturers  and 
large  shippers;  any  merchandise  package  marked  "Value  not 
exceeding  $10,"  unsealed  and  prepaid,  went  to  any  express  office 
in  the  country  for  16^  per  Ib.  —  which  was  to  be  compared  with 
25  to  40^  under  the  ordinary  rates.  "  Section  D  "  was  intended 
for  large  advertisers  and  was  for  printed  matter;  packages 
marked  with  a  designation  of  contents  and  the  legend  "  Value 
not  exceeding  $10"  were  carried  at  \i  per  ounce  with  a  2£ 
discount  on  packages  of  50  ounces  or  more.  "  Section  A"  car- 
ried the  same  goods  at  merchandise  pound  rates  which  were 
lower  than  "  Section  D "  rates  where  a  package  weighed  over 
4|  pounds  —  for  any  tariff  under  $8  per  100  pounds. 

"Scale  J"  made  a  carload  rate  .on  horses  about  half  the  rail- 
road freight  rate;  "  K  "  made  a  rate  of  60  to  80%  merchandise 
rates  on  beer  and  temperance  beverages  — with  a  30^  minimum 
charge;  "L"  applied  package  rates  to  crated  berries — 5j£  to 
$12,  depending  on  size  of  crate  and  length  of  haul  —  in  place 
of  the  100-pound  berry  rate  which  was  60  to  80%  of  the  mer- 
chandise rate;  "  M  "  gave  a  case  rate  for  eggs  of  14^  to  $3.30; 
"N"  covered  the  "general-specials"  noted  before;  "O"  let 
live  poultry  in  crates  pass  at  74  to  80%  of  merchandise 
rates;  "  Z  "  gave  cheese  60  to  80%  merchandise  rates  with  25^ 
minimum. 

The  tariff  system  was  so  complicated  that  experts  could  not 
surely  compute  the  possible  rates  —  which  numbered  over 
600,000,000.  No  relation  prevailed  between  railway  freight  and 
express  rates  —  except  that  the  express  charges  were  not  (with 
rare  exceptions),  and  properly  should  not  have  been,  lower 
than  the  railway-freight  charges.  Many  of  the  operating  con- 
tracts between  express  companies  and  railroads  provided  that 
express  charges  should  be  not  less  than  1|  times,  the  freight. 
In  many  cases  the  express  was  some  three  times  the  freight 
though  up  to  six  times  had  been  noted. 


PROBLEMS  OF  EXPRESS  TRANSPORTATION  RATES      205 

The  Interstate  Express-rate  System.  --  The  rate  system 
evolved  by  the  Interstate  Commerce  Commission  was  much 
like  what  some  of  the  express-officials  had  been  working  towards 
for  many  years,  but  which  they  had  been  unable  to  put  into 
effect  in  spite  of  the  marked  community  of  interests  inside  the 
small  group  of  men  who  controlled  all  the  express  companies  of 
the  country. 

All  goods  have  been  reduced  to  a  simple  classification  of  three 
groups  —  merchandise  (Class  1),  articles  of  food  and  drink 
(Class  2)  and  very  small  packages  (Class  3).  Class  1  is  the 
standard,  the  rate  for  which  is  multiplied  on  risky,  valuable 
or  bulky  articles  —  two  times  for  crated  marble,  scenery,  type- 
writers unboxed,  etc.,  three  times  for  camels  and  elephants  un- 
crated,  eight  times  for  airships  unboxed.  A  very  few  articles,  like 
fruit-basket  material  and  newspapers,  go  for  half  first-class  rates. 

Class  2  rates  in  general  are  75%  of  first  class  —  with  a  mini- 
mum of  25^.  Empty  containers,  crates,  boxes,  etc.,  are  returned 
at  specified  sums  running  from  10  to  50ff.  Third-class  rates 
are  \i  for  each  2  ounces  or  fraction  thereof  —  with  a  minimum  of 
15£  —  but  not  to  exceed  Class  1  charges.  Where  two  or  more 
packages  form  a  single  shipment,  with  an  average  weight  of 
10  pounds  per  package,  the  charge  is  based  on  the  aggregate 
weight.  Where  the  average  weight  is  under  10  pounds  per 
package,  the  charge  is  to  be  figured  upon  10  pounds  per  package. 

The  receipts,  waybills,  etc.,  of  all  the  companies  were  im- 
proved and  made  uniform,  and  chances  of  double  charge  elimi- 
nated. The  ordinary  insurance  liability  of  a  company  was 
limited  to  $50  per  shipment  of  100  pounds  or  less;  excess  value 
carries  an  extra  charge  varying  from  25^  per  $100  where  the 
Class  1  rate  is  $1,  to  50^  where  the  Class  1  rate  is  $8  or  over. 
On  live  stock  1  to  2|%  is  charged  above  fixed  sums. 

Rates  Made  Between  Geographical  Blocks.  —  The  greatest 
innovation  of  the  Interstate  Commission's  order  was  in  the 
system  of  computing  specific  shipper's  charges.  This  is  built 
up  as  though  one  great  express  company  served  the  whole 
country  —  there  are  no  multiple  graduations,  etc.  The  country 
has  been  divided  into  geographical  blocks,  bounded  by  paral- 
lels and  meridians,  and  rates  computed  for  carriage  (including 
pick-up  and  delivery)  from  each  block  into  every  other  block 
where  interstate  commerce  can  occur.  Every  office  in  the  block 


206 


PUBLIC  UTILITY  RATES 


takes  the  same  rate.  By  duplication  and  approximation  all 
these  charges  reduce  to  294  base  rates  applying  to  100-pound 
shipments.  By  having  294  graduation  tables  for  weights  of  1  to 
100  pounds  the  scheme  is  completed. 

The  way  these  charges  ran  is  seen  from  the  following  extracts 
from  the  scales  as  first  announced: 


Rate  Scale  No.  and  Charge 

Weight, 

Lb. 

1 

5 

25 

50 

100 

200 

294 

1 

0.21 

0.21 

0.22 

0.23 

0.26 

0.31 

0  35 

5 

0.22 

0.23 

0.28 

0.34 

0.46 

0  71 

0  95 

10 

0.23 

0.25 

0.35 

0.48 

0.73 

1.23 

1.70 

25 

0.29 

0.34 

0.59 

0.90 

1.52 

2.77 

3  95 

50 

0.37 

0.47 

0.97 

1.60 

2.85 

5.35 

7.70 

75 

0.46 

0.61 

1.36 

2.30 

4.17 

7  92 

11  45 

100 

0.55 

0.75 

1.75 

3.00 

5.50 

10.50 

15  20 

To  give  fair  rates  between  offices  in  the  same  or  adjacent 
blocks,  each  block  has  been  divided  into  16  squares  and  rates 
computed  from  each  square  into  every  other  square  in  the  same 
and  adjacent  blocks. 

The  rates,  shown  in  the  table  just  given,  were  based  on  three 
factors,  (1)  a  charge  of  20^  per  shipment  for  collection  and 
delivery,  (2)  a  charge  of  25^  per  100  pounds  for  railway  ter- 
minal charges,  and  (3)  a  sum  depending  on  weight  and  distance 
of  carriage.  This  latter  the  Commission  stated  it  varied  for 
different  localities  according  to  the  density  of  traffic  and  popu- 
lation therein  and  the  cost  of  operating  railroads,  the  country 
being  divided  into  five  zones.  Zone  I  was  north  of  the  Ohio 
and  Potomac  Rivers  and  east  of  the  Mississippi;  it  is  the  cor- 
ner of  the  country  having  densest  population  and  lowest  freight 
and  passenger  rates.  South  of  this  region  was  Zone  II.  Zone 
III  lay  to  the  west,  roughly  between  the  92nd  and  105th  merid- 
ians but  including  also  northern  Wisconsin  and  Michigan,  above 
43°.  Zone  IV  spread  west  to  the  Sierra  Nevada  Mts.  and 
Zone  V  was  the  strip  between  mountains  and  ocean. 

There  was  still  apparent  wide  variation  in  the  rail  factor 
inside  a  zone  —  in  analyzing  the  rates  in  Zone  I,  for  instance, 
about  $1  per  100  miles  on  100  pounds  may  be  seen  over  some 
routes  and  in  others  only  40^.  The  variations  are  best  seen  by 


PROBLEMS  OF  EXPRESS  TRANSPORTATION  .RATES     207 


analyzing  the  rate  tables,  which  are  given  in  extenso  in  Re  Ex- 
press Rates  (24  I.  C.  C.  381,  28  I.  C.  C.  131  and  35  I.  C.  C.  3). 

While  the  Commission  had  authority  over  interstate  commerce 
only,  the  companies  affected  took  hold  of  the  plan  with  ready 
cooperation  and  adjusted  their  intra-state  business  upon  the 
same  plan,  in  order  to  give  the  scheme  a  fair  trial.  Even  the 
contracts  with  the  railways,  by  which  the  latter  used  to  re- 
ceive from  35  to  60%  of  the  express  revenues,  were  modified 
in  view  of  the  showing  that  nothing  was  due  the  roads  from 
what  the  express  companies  collected  for  pick-up  and  delivery. 
Tentative  Scheme  Inadequate.  —  After  two  years'  trial  of 
the  system  and  rates  outlined  in  the  foregoing  paragraphs, 
the  case  was  reopened  by  the  Commission  on  complaint  of 
the  companies  that  they  were  not  securing  adequate  revenue. 
The  number  of  shipments  was  shown  to  have  increased  from 
191,644,891  in  1914  (2  months  under  the  old  plan  and  10  under 
the  new)  to  193,870,819  in  1915;  the  average  charge  fell  from 
75.6^  to  67. 7ff.  In  these  years  the  operating  expenses  of  the 
companies  decreased  $4,111,992.  The  gross  transportation 
revenue  in  1915  was  $131,173,670.  $66,470,551  was  paid  the 
railways,  $67,084,013  went  into  operating  expenses,  taxes,  etc., 
leaving  $2,380,894  deficit  from  operation.  An  increase  of  3.86% 
was  asked — amounting  to  $5,062,634;  this  was  what  it  was 
estimated  would  be  secured  by  interchanging  the  20  j£  collection- 
delivery  allowance  and  the  25  £  rail-terminal  charge.  This  in- 
crease was  seen  to  bear  heaviest  on  the  small-package  business 
-  which  was  a  desired  effect  since  the  heaviest  cuts  in  the  new 
system  over  the  old  had  been  in  that  field.  The  effect  on  the 
charges  is  shown  in  the  following  extracts  from  the  modified 
scales,  comparable  with  the  table  already  given: 


Rate  Scale  No.  and  Charge 

Weight, 

Lb. 

1 

5 

25 

50 

100 

200 

294 

1 

0.26 

0.26 

0.26 

0.28 

0.30 

0.35 

0.40 

5 

0.26 

0.27 

0.32 

0.39 

0.51 

0.76 

1.00 

10 

0.28 

0.30 

0.40 

0.52 

0.77 

1.27 

1.74 

25 

0.32 

0.37 

0.62 

0.94 

1.56 

2.81 

3.99 

50 

0.40 

0.50 

1.00 

1.62 

2.87 

5.37 

7.72 

75 

0.47 

0.62 

1.37 

2.31 

4.19 

7.94 

11.46 

100 

0.55 

0.75 

1.75 

3.00 

5.50 

10.50 

15.20 

CHAPTER    XII 

RATE   PROBLEMS  OF   STREET  AND   INTERURBAN 
RAILWAY  TRANSPORTATION 

Rise  of  City  Transit.  —  While  industrial  tramways,  with  iron 
rails  on  cross  sleepers  or  stone  blocks,  were  used  abroad  as 
early  as  1770,  such  a  railway  in  city  streets  for  urban  passenger 
transportation  seems  to  have  originated  in  1831  with  Stephen- 
son's  Bowery  line  in  New  York;  the  cars  were  practically  horse- 
drawn  omnibuses.  The  road  was  reported  not  to  be  a  great 
success.  Cars  more  like  the  present  type  appeared  in  1845, 
and  about  1855  came  the  prototype  of  the  present  track  con- 
struction —  1|  by  2|-in.  strap-iron  rails  spiked  to  a  stringer  on 
cross  ties.  The  ballast  was  the  excavated  material,  in  a  few 
cases  topped  with  beach  or  field  stone.  By  1870  most  of  the 
important  cities  in  America  had  some  form  of  horse  railway. 
The  system  of  cars  hauled  by  a  cable  driven  through  a  small 
under-track  conduit  by  a  stationary  steam  engine  appeared 
in  New  York  in  1869,  in  San  Francisco  in  1873,  and  in  Chicago 
in  1881.  The  scheme  was  technically  successful  and  only  the 
development  of  the  more  flexible  electric  traction  caused  the 
abandonment  of  the  cable. 

Surface  cars  were  seen  to  be  necessarily  slow  in  busy  streets, 
so  that  with  the  growth  of  American  cities,  the  need  of  urban 
rapid  transit  became  gradually  pressing.  The  elevated  road 
with  stations  say  each  five  blocks  was  the  first  improvement, 
and  construction  was  undertaken  on  a  considerable  scale  in 
New  York  from  1878  on.  Operation  with  steam  locomotives 
was  seen  until  1901  when  a  third-rail  electric-traction  system 
was  found  successful,  employing  motor-equipped  passenger  cars. 

From  as  early  as  1835  various  attempts  to  propel  vehicles 
by  electric  motors  had  been  attempted,  but  no  great  progress 
was  possible  until  engine-driven  generators  and  the  distribution 
of  power  over  extended  conductor  systems  became  feasible. 
The  first  successful  commercial  line  was  opened  at  the  Berlin 

208 


.     RATE  PROBLEMS  OF  STREET  RAILWAYS  209 

Exposition  in  1879;  in  1881  this  was  developed  into  a  public 
line  at  Lichtenfelde.  In  1883  a  light  third -rail  line  was  oper- 
ated between  Saratoga  Springs  and  Mt.  McGregor  (N.  Y.)  — 
some  10  miles.  In  1884  a  conduit  road  was  opened  in  Cleve- 
land and  also  a  line  in  Kansas  City  with  an  overhead  contact 
or  trolley  wire.  The  line  in  Appleton,  Wis.  (1886),  is  commonly 
considered  the  first  commercially  successful  American  electric 
railway.  By  1888  F.  J.  Sprague  had  completed  the  Richmond 
(Va.)  installation  where  were  laid  the  foundations  of  present 
practice  —  separation  of  car  body  and  motor  trucks,  the  under- 
running  trolley,  flexible  motor  suspension,  etc. 

In  1886  there  were  3268  miles  of  street  railways  and  only  two 
electric  lines.  In  1889  there  were  5285  miles  of  street  railways 
and  70  electric  lines.  By  1907  there  had  come  to  be  25,547 
miles  of  line  (34,382  miles  of  track)  with  70,000  cars,  580  power 
houses  of  2,520,000  kw.  capacity  —  representing  in  the  aggre- 
gate with  auxiliary  equipment  $3,774,772,000.  By  1912  (the 
last  U.  S.  Census  of  this  industry)  there  were  30,438  miles  of 
line,  41,065  miles  of  tracks  (only  256  miles  of  which  were  not 
operated  by  electricity),  76,160  passenger  and  7790  freight  cars, 
500  power  houses  of  3,665,000  kw.  capacity  —  representing  in 
all  $4,708,568,000. 

Some  Technical  Features.  —  Street,  suburban  and  interur- 
ban  lines  have  general  technical  features  much  alike  —  the  chief 
differences  being  mechanical,  on  account  of  the  progressively 
heavier  cars  and  higher  speeds  required  for  attractive  subur- 
ban and  interurban  service.  All  roads  are  alike  in  that  they 
generate  electric  energy  at  a  central  station  and  transmit  it  over 
a  system  of  feeders  and  running  conductors  from  which  the 
cars  derive  their  power  (except  of  course  those  few  lines  which 
are  satisfactorily  served  by  self-propelled  gasoline-engine  or  stor- 
age-battery cars). 

For  street  railways  the  preferred  running  conductor  is  a  bare 
copper  wire  about  |  inch  in  diameter  strung  on  insulating  hang- 
ers over  the  center  of  the  track  from  cross  wires  or  brackets. 
The  trolley  wire  hangs  in  a  series  of  drooping  curves  which  are 
none  too  sightly  where  conspicuous,  and  not  very  serviceable  if 
high  speeds  have  to  be  attained.  For  fast  running,  a  more 
expensive  overhead  construction  —  known  as  the  catenary  type 
—  is  employed :  A  steel  messenger  cable  takes  the  place  of  the 


210  PUBLIC  UTILITY  RATES 

trolley  wire  between  main  supports  and  hangs  in  more  pro- 
nounced curves;  from  the  messenger  in  turn  the  trolley  or  run- 
ning wire  is  supported  at  frequent  intervals  by  hangers  of  such 
length  that  the  running  wire  is  practically  parallel  with  the  rails. 

Every  layman  even  is  familiar  with  the  construction,  if  not 
with  the  function  of  the  trolley-arm  collector  —  the  long  pole 
carrying  a  small  deep-grooved  bronze  wheel  running  under- 
neath the  trolley  wire.  An  insulated  cable  rings  the  current 
from  the  pole  to  the  controller  and  motor  whence  it  returns  to 
the  station  or  substation  via  the  running  wheels  and  track. 
Departure  from  the  trolley-pole  equipment  is  seen  on  a  number 
of  high-speed  interurban  cars  which  have  pantograph  frames 
with  sliding  bows  or  rollers  to  make  contact. 

In  a  few  important  cities  where  traffic  is  heavy  enough  to 
warrant  the  expense  (notably  New  York  and  Washington)  the 
running  conductors  are  steel  T-rails,  placed  in  a  slotted  conduit 
open  to  the  street;  suspended  from  the  car  trucks  are  plows 
which  carry  slippers  in  contact  with  the  conductors. 

For  elevated  or  subway  rapid-transit  lines,  the  running  con- 
ductor commonly  is  a  steel  third  rail  supported  on  insulators 
at  one  side  of  the  track.  The  current  collectors  are  then 
short  hinged  arms,  or  shoes  or  slippers,  on  brackets  carried  by 
insulated  frames  on  the  sides  of  the  trucks.  The  collectors  on 
such  urban  lines  commonly  slide  along  on  top  of  the  contact  rail, 
though  an  under-running  design  has  been  found  satisfactory  in 
heavy  railroad  electrification  (New  York  Central  Railroad  met- 
ropolitan zone). 

The  most  common  power-supply  schemes  involve  the  use  of 
direct  current  at  500  to  600  volts.  In  recent  years  this  has 
become  a  combined  alternating-  and  direct-current  system, 
since  the  primary  supply  is  from  three-phase  generators  and 
this  is  transmitted  at  high  voltage  to  rotary  converters  located 
at  favorable  feeding  points  along  the  railway  system. 

Cars  are  controlled  and  operated  by  a  motorman  while  a 
conductor  is  in  charge  and  collects  fares.  On  account  of  the 
inconvenience  of  the  conductors  passing  back  and  forth  through 
crowded  aisles  of  city  cars,  because  of  fares  missed,  and  on  ac- 
count of  greater  chance  of  accidents  when  the  conductor  is 
away  from  the  entrance,  a  new  type  of  car  has  been  evolved  to 
remedy  these  evils.  This  is  the  "  prepayment "  or  "  pay-as-you- 


RATE  PROBLEMS  OF  STREET  RAILWAYS  211 

enter"  design,  with  separate  entrance  and  exit;  the  conductor 
has  a  fixed  post  at  the  entrance  and  collects  fares  as  passengers 
pass  into  the  body  of  the  car.  "  Pay-as-you  leave"  cars  are 
also  used. 

Recently,  to  meet  the  competition  of  motor-busses,  light  one- 
man  cars  have  been  successfully  put  into  extensive  service  in 
a  large  number  of  the  smaller  cities.  One  man  serves  as  both 
motorman  and  conductor,  the  passengers  entering  and  paying 
at  the  front  vestibule.  This  cuts  the  labor  costs  in  two,  and, 
the  lighter  cars  being  smaller,  appreciably  reduces  energy  and 
maintenance  charges.  A  frequent  fly-away  service  with  fewer 
stops  is  furnished  which  seems  to  be  the  attraction  of  the 
motor-bus. 

Depth  of  Organization.  —  While  the  platform  labor  —  con- 
ductors and  motormen  —  is  what  the  public  comes  most  in  con- 
tact with,  yet  it  should  be  remembered  in  studying  rates  that 
there  are  other  needed  organizations  of  size  and  importance,  and 
expense.  The  tracks,  wires  and  rolling  stock  have  to  be  re- 
paired day  by  day;  there  are  a  certain  number  of  service  in- 
spectors, dispatchers,  switchmen  and  flagmen;  there  are  the 
firemen,  enginemen,  oilers  and  switchboard  attendants  in  the 
power  plants  and  substations;  the  funds  collected  by  the  con- 
"ductors  have  to  be  received,  the  men  paid,  the  company's  pur- 
chases audited.  All  this  demands  an  important  system  —  but 
one  which  the  public  rarely  touches.  Then  over  all  and  gather- 
ing together  the  several  departments  in  a  concern  of  size  there 
have  to  be  a  number  of  general  executive  officers;  and  the 
satisfaction  of  the  public  depends  to  a  marked  degree  on  the 
calibre  and  ability  of  these  men. 

Reasons  for  Nickel  Fares.*  —  The  universal  fare  on  the  early 

*  Before  these  notes  on  fare  problems  of  electric-railway  transportation 
were  completed,  the  official  manual  on  street-railway  traffic,  costs  and  fares 
of  the  American  Electric  Railway  Association  had  appeared  —  "Cost  of 
Urban  Transportation  Service"  by  F.  W.  Doolittle,  Chief  of  the  Bureau 
of  Fare  Research.  That  book  makes  use  of  many  of  the  same  important 
published  papers  referred  to  in  this  section  and  it  covers  the  economics  of 
costs  and  fares  in  much  greater  detail.  Although  to  some  persons  it  neces- 
sarily must  appear  as  a  partisan  discussion,  yet  it  will  be  seen  to  be  broadly 
based  on  data  and  studies  of  regulating  commissions  as  well  as  of  officials  of 
supporting  railways.  Its  appearance  has  made  possible  the  omission  of 
some  detail  originally  covered  in  this  section. 


212  PUBLIC  UTILITY   RATES 

horse  railways  was  a  nickel  —  from  convenience  in  collection 
and  from  belief  that  patrons  would  yield  that  sum  quite  as 
willingly  as  any  smaller  one.  As  city  lines  were  first  extended 
the  five-cent  fare  was  adhered  to  by  managements  partly  from 
the  overestimated  inconvenience  of  making  penny  change,  part- 
ly to  encourage  travel  and  partly  knowing  that  a  dime  was  too 
great  a  sum  for  the  service.  But  with  the  growth  of  suburban 
lines  the  necessity  of  extra  fares  for  the  longer  hauls  became 
appreciated  and  nickel  zones  grew  up. 

Growth  of  City  Systems.  —  The  expansion  of  cities  and  the 
absorption  of  outlying  municipalities  within  city  limits  has 
brought  very  serious  problems  to  electric-railway  companies,  for 
in  many  cases  extensions  have  been  governed  by  new  fran- 
chises which  fixed  the  fare  limits  and  frequency  of  service 
without  adequate  consideration  of  what  it  would  cost  a  com- 
pany. 

To  see  the  growth  of  cities  and  some  of  the  burdens  thrust 
upon  the  street-railway  systems  a  few  scattered  typical  cities, 
for  which  data  have  been  collected,  may  be  cited.  Thus  De- 
troit in  1870  had  only  11  square  miles  within  city  limits,  but  this 
area  has  jumped  to  13.7,  20.2,  27.3,  39.7  and  41.8  square  miles 
—  a  gain  of  300%  in  45  years.  The  population  served  had  risen 
from  some  80,000  in  1870,  to  465,766  in  1910,  and  674,000  in' 
1915.  The  maximum  length  of  single-fare  ride  had  gone  to 
12.5  miles  in  1901,  and  13.5  in  1910,  and  13.5  in  1915.  In  these 
years  the  car-miles  (number  of  cars  times  miles  of  trips)  had 
jumped  from  14,614,000  to  22,847,000  and  33,696,000,  and  the 
revenue  per  car-mile  from  17.78^  to  23.20^  and  25.81j£. 

Milwaukee,  Wis.,  rose  from  an  area  of  10.3  square  miles  in 
1870  to  25.9  in  1915  (35.40  inside  first-fare  limits),  while  the 
population  grew  from  14,000  to  425,000  (455,000  inside  first- 
fare  limits).  Tracks  extended  from  25  miles  to  136. .  In  1890 
the  longest  single-fare  ride  was  4  miles;  in  1910  it  was  12.1 
miles;  in  1915  it  was  10.8  miles.  In  these  years  the  car-mile 
record  shifted  from  8,395,000  to  13,813,000,  and  to  14,323,000; 
the  earnings  per  car-mile  went  from  22.04  to  27.42^  and  27.31  i. 
Milwaukee  is  of  special  interest  because  of  the  zone  system  re- 
cently installed,  giving  fares  based  on  cost  of  service  in  the 
different  districts  as  noted  more  in  detail  in  a  later  para- 
graph. 


RATE  PROBLEMS  OF  STREET  RAILWAYS  213 

Memphis,  Tenn.,  had  only  2.8  square  miles  area  in  1870  but 
19.3  in  1914  —  a  total  growth  of  some  560%.  Meantime  the 
population  rose  from  40,226  to  155,000.  In  1906  there  were 
68.6  miles  of  street-railway  track  and  in  1910  it  was  110.4  miles; 
in  these  years  the  maximum  single-fare  rides  were  9.6  and  16.1 
miles  respectively;  in  1915  it  was  15.7  miles.  The  car-miles 
of  1906  were  6,221,000;  in  1910  they  were  6,895,000,  and  in 

1914,  7,966,000.     The  passenger-car-mile  revenues  in  these  years 
were  22.96^,  26.14^  and  25.09^. 

Birmingham,  Ala.,  gives  a  remarkable  case  of  territorial  ex- 
tension. In  1870  the  city  area  was  about  |  square  mile,  which 
has  jumped  to  50.1  (in  1915)  —  although  only  20  square  miles 
has  a  typical  city  development.  The  early  population  was 
insignificant  —  about  1000;  in  1910  it  was  132,700;  and  in 

1915,  198,000.     By  1890  the  system  had  81  miles  of  track  and 
in  1910,   133  miles.     In  1900  the  longest  single-fare  ride  was 
7.3  miles;    in  1910  it  was  13.6,  and  in  1915  it  was  14.9.     In 
1902  about  3,519,000  car-miles  were  recorded,  in  1910,  6,195,000 
and  in  1915,  8,044,000.     The  passenger  earnings  per  car-mile 
were  20.74^  in  1902,  26.32  in  1910  and  19.8  in  1915.     This 
city   has   imposed   single-fare  limits   coincident  with   the  city 
boundaries;    beyond  this  the  company  has  several  5£  zones. 

Early  Departures  from  Nickel  Fares.  —  Probably  few  people 
realize  that  there  was  a  general  small-unit  rise  in  fares  on  horse- 
railways  toward  the  close  of  the  Civil  War  when  Congress  saw 
fit  to  impose  a  revenue  tax  of  |j£  per  passenger.  This,  coin- 
cident with  increased  cost  of  labor  and  supplies,  caused  most 
companies  to  increase  the  fare  from  5  to  6ff.  Indeed  in  1865 
Congress  expressly  authorized  such  a  move. 

In  New  York  City  *  it  was  1880  before  all  the  lines  had  gone 
back  to  5^.  In  Brooklyn,  the  5£  was  made  6^  in  1865-1870; 
8  and  10  j£  was  charged  beyond  city  limits  up  to  1895  when  5^  be- 
came the  universal  unit.  In  Boston  the  original  5^  fare  was 
made  6^  in  1866  and  held  there  until  1880;  thereafter  5,  10,  15, 
18  and  20j£  were  collected  on  the  longer  lines.  But  after  con- 
solidation and  electrification  the  nickel  fare  again  became  uni- 
versal. In  Philadelphia  the  street  (horse)  railways  started 
about  1858  with  5£  fares  but  raised  them  to  6^  in  1864  and  to 

*  F.  R.  Ford,  in  Report  of  Committee  on  Basis  of  Rates,  and  Fares,  Amer- 
ican Electric  Ry.  Assoc.,  Oct.,  1911. 


214  PUBLIC  UTILITY  RATES 

7j£  in  1866.  In  1877  a  reduction  to  Q£  was  made,  exchange  and 
transfer  tickets  remaining  9^.  Between  1877  and  1887  the  city 
councils  made  5^  fares  a  condition  of  extensions. 

Electric  Traction  has  not  Prevented  Congestion.  —  Many 
early  sociological  students  expected  that  quick  and  cheap  trans- 
portation, afforded  from  the  environs  of  a  city  or  town  of  in- 
dustrial importance,  would  automatically  prevent  all  undesirable 
congestion  of  population.  Undoubtedly  it  has  materially  modi- 
fied and  checked  the  congestion  that  would  have  accompanied 
modern  commercial  and  manufacturing  developments  had  easy 
transportation  not  been  available  (assuming  the  questionable 
position  that  this  industrial  development  could  have  been  possible 
at  all  without  the  growth  in  transit  facilities).  It  has,  however, 
only  enabled  those  workers  who  preferred  rural  environment  to 
secure  it  —  those  whose  tastes  or  income  dictated  living  in 
crowded  districts  have  remained  in  such  numbers  that  the 
tenements  have  not  disappeared. 

Natural  Step  to  Suburban  and  Interurban  Lines.  —  It  was 
a  simple  and  natural  matter  to  extend  the  strictly  city  line 
out  into  the  thinly  settled  areas.  This  was  welcomed  by  the 
real-estate  promoters,  and  it  greatly  encouraged  the  develop- 
ment of  residential  districts  but  it  is  doubtful  if  the  railway 
people  realized  their  dreams  of  profitable  traffic  in  any  case  as 
quickly  as  they  were  led  to  expect. 

The  successful  transmission  of  power  over  long  stretches  of 
territory,  and  its  easy  conversion  into  forms  of  current  suit- 
able for  street-railway  operation,  probably  suggested  continu- 
ous lines  of  electric  railway  from  town  to  town.  The  early  pro- 
moters cherished  the  illusion  that  light  tracks  along  highways, 
with  sharp  curves  and  heavy  grades,  abolition  of  locomotives 
and  expensive  passenger  stations,  etc.,  would  result  in  greatly 
decreased  investment,  operating  costs  and  fares,  over  those 
for  steam  railways,  and  in  grand  profits.  But  it  became  neces- 
sary to  carry  baggage,  and  then  express  and  package  freight 
and  mail  were  taken  on.  The  necessity  for  heavier  track  con- 
struction and  reduced  grades  and  curves  began  to  be  felt;  bet- 
ter schedules,  train-dispatching  systems,  safety  devices,  terminal 
and  way  stations,  and  private  rights  of  way  had  to  be  pro- 
vided. The  economies  over  steam  road  operation  began  to 
diminish. 


RATE  PROBLEMS  OF  STREET  RAILWAYS  215 

Financial  Status  of  the  Industry.  —  According  to  the  1912  U.  S. 
Census  of  this  industry  there  was  outstanding  $2,324,224,000 
in  bonds  or  equivalent  and  $2,384,344,000  in  stock.  For  1912 
the  average  return  on  stock  was  but  2.65%  and  on  bonds 
4.90%.  According  to  the  Census  reports  there  is  basis  for  the 
claim  that  the  fair  value  of  street  railway  property  was  not  less 
than  the  stocks  and  bonds  —  $4,708,568,000. 

Of  course  this  poor  showing  was  caused  by  the  companies 
which  paid  little  or  no  dividends.  In  Wisconsin  where  the  aver- 
age rates  of  return  are  as  good  as  anywhere  in  the  country  - 
with  probably  fewer  extremes,  only  44%  of  the  lines  declared 
dividends  —  the  rate  averaging  5.55%.  In  Massachusetts  the 
average  dividend  over  a  period  of  20  years  was  5.28  and  the 
average  divisible  net  income  was  5.68%. 

The  investment  in  a  normal  electric  street-railway  property 
is  apparently  of  the  order  of  $4  for  each  $1  of  gross  earnings  - 
for  both  large  and  small  companies.  This  would  be  on  the  basis 
of  present  values,  including  intangibles,  and  would  neglect  the 
effects  of  large  sums  lost  in  obsolete  items  like  cable  roads. 
It  would  not  apply  to  unusual  conditions  where,  for  instance, 
an  expensive  underground  conduit  line  was  required,  as  in  New 
York  City  and  Washington. 

This  figure  is  borne  out  by  figures  presented  by  H.  G.  Bradlee 
in  1912.*  Nine  companies  having  gross  annual  receipts  of 
over  $1,000,000,  had  investments  of  respectively  $3.03,  $3.15, 
$3.25,  $3.30,  $3.90,  $4.00,  $4.40,  $4.97,  $5.55  per  $1  of  gross 
receipts.  One  company  of  between  $750,000  and  $1,000,000 
gross  receipts  had  $3.  Two  concerns  of  gross  earnings  between 
$500,000  and  $750,000  showed  $3.00  and  $3.90  respectively. 
Four  railways  having  between  $250,000  and  $500,000  gross  had 
unit  investments  of  $3.80,  $4.20,  $4.40  and  $4.40  respectively. 
Four  companies  having  annual  gross  earnings  of  less  than 
$250,000  had  investments  of  $3.70,  $3.70,  $4.20  and  $4.50. 
The  average  of  all  these  20  companies  was  $3.92. 

Peculiarities  as  an  Utility.  —  In  considering  the  application 
of  general  discussions  of  utility  problems  to  electric-railway 
service,  it  becomes  obvious  first  that  here  is  a  service-type  utility 

*  Appendix  B.  1912  Report  of  Committee  on  Proper  Basis  of  Fares, 
American  Electric  Railway  Association;  "Actual  Figures  of  Existing  Street 
Railways,"  H.  G.  Bradlee,  of  Stone  and  Webster,  Boston. 


216  PUBLIC  UTILITY   RATES 

and  not  a  product  dispenser.  The  service  of  most  roads  has  the 
pioneer-day  feature  that  all  the  customers  are  put  in  one  big 
class  and  all  charged  a  single  flat-rate  fare,  though  there  is  an 
evident  desire  to  break  away  from  this  by  the  use  of  several 
small-fare  zones  which  serve  to  classify  customers  by  length 
of  journey.  It  has  apparently  been  considered  to  be  of  little  or 
no  use  to  cultivate  off-peak  classes  by  special  rates  which  might  be 
permissible  —  since  the  service  is  such  an  intimately  personal 
matter  that  the  equity  of  such  discrimination  between  persons 
and  classes  would  not  be  recognized  and  the  differences  would 
be  resented.  Moreover,  the  people  who  seek  preferential  treat- 
ment —  like  workingmen's  tickets  —  seek  it  on  social  grounds 
unrelated  to  the  railway  business,  and  for  peak-load  periods 
when  oftentimes  the  real  cost  of  added  facilities  rises  faster  than 
the  added  income  at  full  rates. 

The  load  factor  on  city  lines  is  perhaps  the  lowest  of  all  the 
public  utilities  —  about  33%  of  the  traffic  is  handled  in  four  hours 
of  each  day.  This  arises  of  course  from  the  desire  of  workers 
to  travel  morning  and  night  —  or  morning,  noon  and  night, 
Sharp  peak  loads  are  produced  by  such  a  concentration  of  traffic, 
and  it  is  short-hour  concentration  which  excuses  strap-hangers 
—  for  it  may  be  a  physical  impossibility  to  operate  cars  enough 
to  give  seats  for  all  who  attempt  to  board  at  once.  In  many 
cases  —  possibly  in  most  —  to  order  a  company  to  furnish  rush- 
hour  cars  up  to  the  absolute  limit  of  ability  to  run  them  over  a 
given  line  may  cause  unremunerative  operation. 

Obviously  various  data  can  be  used  in  comparing  the  con- 
centration of  traffic  on  one  line  with  another,  and  in  one  hour  or 
another;  the  "concentration  factor"  employed  by  the  Fare  Re- 
search Bureau  of  the  American  Electric  Railway  Association 
is  the  ratio  of  number  of  passengers  who  would  be  carried  in  24 
hours  at  maximum  peak  figures  to  the  actual  number  in  24  hours/ 

What  is  called  "diversity-factor"  in  other  utilities  does  not 
enter  electric-railway  operation  as  such,  for  a  person  either  rides 
or  does  not  ride;  there  is  no  quarter  or  half  load  so  far  as  one 
customer  is  concerned.  There  is  used,  however,  a  figure  which 
is  indeed  called  "  diversity  factor,"  and  it  needs  to  be  carefully 
distinguished  from  the  diversity  factor  of  other  utilities.  The 
street  railways'  diversity-factor  (according  to  the  use  of  the 
American  Electric  Railway  Association  Fare  Research  Bureau) 


RATE  PROBLEMS  OF  STREET  RAILWAYS  217 

shows  the  difference  of  traffic  carried  by  consecutive  cars  over  a 
given  line  in  a  definite  interval.  Numerically  it  is  the  percent- 
age ratio  of  average  number  of  passengers  per  car  to  maximum 
for  the  period  and  place  selected. 

The  costs  of  operation  in  different  cities,  expressed  for  the  units 
most  nearly  comparable,  like  car-hours,  car-miles,  passengers, 
passenger-miles,  etc.,  have  been  found  to  vary  extraordinarily 
even  when  each  company  under  discussion  is  operating  as  effi- 
ciently and  satisfactorily  as  possible  under  its  local  conditions. 
This  means  simply  that  even  after  giving  consideration  to  the 
usual  evident  conditions  there  remain  so  many  variables  un- 
disclosed that  direct  unweighted  comparisons  are  untrustworthy. 
In  many  cases  certain  units  of  operation  may,  on  careful  scrutiny, 
be  valid  bases  of  study;  but  these  same  units  may  lead  to  wild 
results  in  other  cases.  Each  case  is  to  be  judged  largely  by  itself 
in  ascertaining  proper  and  reasonable  fares  —  or,  better  expressed 
for  most  cases,  the  limitations  to  be  placed  on  travel  for  a  single 
fixed  common  fare. 

The  commonly  seen  units  on  which  roads  have  been  compared 
are,  for  example,  operating  and  fixed  cost  per  passenger,  per 
track-mile,  per  car-mile  and  per  car-hour.  Each  may  be  of 
use  at  times  but  they  should  not  be  held  up  as  universal  in- 
dices. Number  of  passengers  alone  gives  unreliable  results 
since  the  length  of  travel  varies  from  place  to  place,  line  to  line, 
season  to  season  and  hour  to  hour.  Passenger-miles  comes 
nearer  to  wide  application  but  again  here  curves,  grades,  sched- 
ules and  peak  loads  materially  alter  the  showing.  Moreover, 
the  length  of  a  passenger's  trip  is  not  easily  ascertained,  special 
counts  having  to  be  made  over  typical  periods  and  the  results 
taken  as  applying  to  continuous  operation. 

Tests  for  Fixed  Charges,  Etc.  —  The  tests  for  fixed  charges 
previously  outlined  perhaps  need  special  interpretation  for  appli- 
cation to  electric-railway  studies.  Peak-load  distinctions  in 
fares  are  not  practicable  so  that  apportionment  of  fixed  charges 
on  that  basis  is  usually  out  of  the  question. 

Fixed  charges  may  be  grouped  by  scrutinizing  and  dividing 
the  annual  expense  accounts  as  fixed,  operating  and  customer's 
in  accordance  with  such  test  questions  as:  "Is  this  most  con- 
cerned with  merely  providing  equipment?  "  "  Is  this  item  de- 
pendent on  amount  of  ultimate  service  given? "  "Is  this  item 


218  PUBLIC  UTILITY  RATES 

caused  by  dealings  with  individual  customers?  "  It  can  be  seen 
that  there  are  a  few  small  customer  costs  but  their  close  deter- 
mination is  difficult  and  they  are  generally  allowed  to  merge 
with  fixed  and  operating  costs. 

It  is  seen  that  some  items  of  expenditure  are  to  be  split  be- 
tween fixed  and  operating  charges.  This  should  be  done  in 
accordance  with  any  real  knowledge  of  the  proper  proportions  - 
such  as  in  regard  to  retirance  for  weather-  and  wear-deteriora- 
tion, and  expenses  of  the  engineering  department.  But  where 
definite  knowledge  of  proper  apportionment  is  lacking  it  is 
often  sufficient  to  split  the  aggregate  of  such  items  —  like  costs 
of  administration,  general  office  expense,  working  capital,  amor- 
tization of  intangibles  —  according  to  degree  of  utilization  of 
plant.  This  can  be  done  according  to  the  ratio  of  actual  passen- 
ger-miles to  possible  passenger-miles  with  the  cars  as  run,  or 
it  can  be  done  by  dividing  in  proportion  to  the  ascertainable 
fixed  and  service  charge.  But  the  use  of  such  a  segregation  is 
not  so  obvious  as  with  most  other  utilities  where  peak  loads 
•fix  participation  in  fixed  costs. 

Fixing  the  Fare.  —  One  way  of  looking  at  the  fare  problem 
considers  that  there  is  a  potential  service  available  to  every 
customer  —  a  readiness  to  serve,  the  charge  for  which  is  the 
total  of  fixed  charges  as  above  determined  divided  by  the  num- 
ber of  passengers  the  system  is  expected  to  carry  without  more 
equipment.  This  is  a  sort  of  minimum  charge  which  must  be 
collected  from  every  customer  and  to  which  would  have  to 
be  added,  of  course,  the  other-customer  costs  if  any.  If  a  zone 
system  were  in  effect,  the  shortest  possible  ride  should  yield 
this  sum  at  least.  Some  might  expect  that  these  fixed  costs 
should  be  divided  among  the  passengers  actually  carried  rather 
than  the  passengers  for  which  the  equipment  is  sufficient  as  it 
normally  flows;  but  to  divide  it  among  actual  customers  is  like 
dividing  all  the  fixed  charges  in  a  water  or  electricity  works 
among  the  units  of  actual  peak-load  instead  of  units  of  peak-load 
capacity  of  equipment  —  which  at  once  is  recognized  to  be  in- 
equitable and  to  place  a  premium  on  careless  over  development. 
However,  on  account  of  the  inflexibility  of  street-railway  fares 
and  fare  zones,  greater  latitude  may  be  allowed  in  the  calcu- 
lations. 

Then  the  second  group  of  expenses,  rising  closely  with  the 


RATE  PROBLEMS  OF  STREET  RAILWAYS  219 

number  and  distance  of  passengers  carried,  expressed  say  as 
an  average  cost  per  passenger-mile  would  give  the  additions  to 
the  minimum  charge  for  each  unit  length  traversed.  For  ex- 
ample it  might  turn  out  that  each  customer  should  yield  up  ?>i 
minimum  plus  1^  per  mile  carried.  Then  in  a  central  zone  of 
2-mile  radius  from  the  transportation  center  —  or  such  dis- 
tance out  as  studies  showed  resulted  in  an  average  of  2  miles 
per  trip  —  there  could  be  the  usual  5£  fare  and  for  each  mile  or 
two  miles  beyond  there  could  be  the  collection  of  2^  more. 

No  case  is  recorded  of  precisely  this  sort  of  rate  fixing  but 
the  New  Jersey  Commission  once  indicated  (So.  Englewood 
Imp.  Assoc.  v.  N.  J.  &  H.  R.  Ry.;  Dec.,  1911)  that  a  scheme 
somewhat  resembling  it  might  have  to  be  put  into  effect. 

Wisconsin  Idea  of  Fares.  —  A  somewhat  different  apportion- 
ment of  expenses  designed  to  secure  the  same  ends  and  leading 
up  to  a  zone  system  of  fares  was  worked  out  very  carefully  by 
the  Wisconsin  Railroad  Commission  in  1914  (Milwaukee  v.  T. 
M.  E.  R.  &  L.  Co.,  10  Wis.  R.  R.  Comm.  Rep.  1).  The  fixed 
costs  were  defined  as  those  which  would  exist  if  there  were  no 
traffic — which  is  seen  to  be  another  way  of  stating  "expenses 
of  providing  equipment"  —covering  most  of  interest  on  in- 
vestment, the  compensation  for  depreciation  due  to  the  ele- 
ments alone,  a  part  of  the  maintenance  and  repair  costs,  and  the 
part  of  power  costs  usually  assessed  on  demand.  These  were 
called  "  terminal  "  costs. 

Because  a  certain  minimum  amount  of  car  service  was  re- 
quired on  definite  schedules  in  spite  of  very  light  traffic  in 
some  hours,  the  expenses  of  conducting  transportation,  the  out- 
put costs  of  the  power  plants  and  the  part  of  maintenance 
and  depreciation  caused  by  wear  were  held  to  be  part  "ter- 
minal "  and  part  "  movement "  in  their  nature.  The  exact  divi- 
sion of  .this  group  was  made  according  to  the  ratio  of  average 
carload  to  "  comfortable "  carload.  (It  would  seem  to  have 
been  more  logical  to  make  the  division  according  to  utilization 
more  strictly  —  say  inversely  by  the  ratio  of  actual  passenger- 
miles  to  possible  passenger-miles  for  the  cars  as  run.) 

Certain  expenses  were  held  to  vary  directly  with  the  traffic 

—  items  like  cost  of  injuries,  and  part  of  conducting-transpor- 
tation  expense,  and  these  were  considered  to  be  purely  "  move- 
ment" charges.  Certain  other  expenditures,  as  for  general 


220  PUBLIC  UTILITY  RATES 

administration,  could  not  be  definitely  allocated  and  so  were 
divided  according  to  the  proportions  of  the  ascertainable  termi- 
nal and  movement  costs. 

The  terminal  costs  were  assessed  by  the  Wisconsin  Commis- 
sion on  the  probable  number  of  passengers  to  be  carried  as  a 
minimum  charge  and  the  movement  costs  were  distributed  as 
cost  per  passenger-mile  in  fixing  the  width  of  traffic  zones. 

Apportionment  of  Standard-account  Items.  —  After  running 
through  the  uniform  system  of  accounts  prescribed  for  electric 
railways  by  the  Interstate  Commerce  Commission,  and  adopted 
by  the  American  Electric  Railway  Association,  the  following 
division  into  fixed  and  movement  costs  has  been  made  as  show- 
ing the  probable  results  of  applying  the  ideas  already  noted  as 
acceptable.  Obviously  this  cannot  be  an  accurate  indication 
of  what  would  be  found  advisable  for  each  account  of  every 
railway.  In  a  specific  case  the  actual  accounts  studied  in  the 
light  of  the  Interstate  Commerce  Commission  recommendations  * 
will  indicate  the  proper  division.  One  practice  of  this  commission 
has  been  followed  in  this  illustrative  tabulation  —  dividing 
accounts  not  directly  scrutinizable  according  to  the  division 
of  aggregate  related  accounts.  (See  "  Rules  Governing  Sepa- 
ration of  Operating  Expenses  between  Freight  and  Passenger 
Service  on  Large  Steam  Railways,"  Interstate  Commerce 
Commission,  1915.) 

*  Bulletins:  "Uniform  System  of  Accounts  for  Electric  Railways,"  "De- 
cisions on  Questions,  Uniform  Accounts  for  Electric  Railways,  Interstate 
Commerce  Commission. 


RATE  PROBLEMS  OF  STREET  RAILWAYS 


221 


TABLE  ILLUSTRATING  TYPICAL  APPORTIONMENT  OF  ELECTRIC-RAILWAY  EXPENSE 

ACCOUNTS  AS  FIXED  OR  TERMINAL  AND  VARIABLE  OR  MOVEMENT  CHARGES: 

FOLLOWING  INTERSTATE  UNIFORM  SYSTEM  OF  ACCOUNTS 


Account 
Number 

Description 

Fixed  % 

Variable  % 

Income  * 
215 
216 
217 
218 
220-1 
222 
224 
225 

\ccounts  —  Debits 
Taxes  

100 
100 
90 
90 
100 
100 
100 
90 

10 
10 

10 

Rental,  leased  lines  

Miscellaneous  rent  

Miscellaneous  taxes  

Interest  on  funded  and  unfunded  debt.  .  .  . 
Amortization,  funded  debt  

Maintenance  of  organization  

Miscellaneous  

Operating 
1 

2 
3 
4-6 

7 

8-9   j 

\  10 
i   J1-12J 
13 
14-15  j 

16-18  1 

j  V"i  19 

*  20-22  j 

23 
24 
25 

26-27  j 

29 

30-31 
32 
33 

34-37  \ 

38 

39 
40-41 

42-43  j 

;  Accounts  —  Expense 
Superintendence,  way  and  structures.  .  .  < 
Ballast  ,  

According 
sion  of  A 
90 
80 
10 
90 
Accordin 
vision 
counts 
90 

100 
100 

90 

100 

According 
sion  of  A< 

100 

100 
70 
60 
According 
sion  of  A 
According 
sion  of  A 
20 
40 
10 
Accordin 
vision 
counts 
According 
sion  of  A< 
According 
sion  of  Ac 
20 
Accordin 
vision 
counts 

;  to  divi- 
ccts.  2-25 
10 
20 
90 
10 
g   to  di- 
of     Ac- 
2-6 
10 

10 

;  to  divi- 
jcts.  10-18 

30 
40 

;  to  divi- 
ccts.  2-25 
;  to  divi- 
jcts.  30-43 
80 
60 
90 
g    to    di- 
of      Ac- 
30-33 
;  to  divi- 
;cts.  20-37 
;  to  divi- 
scts.  30-35 
80 
g  to  di- 
of    Ac- 
30-41 

Ties  

Rails,  fastenings,  joints  and  special  work.  . 
Repairs,  underground,  construction  

Track  and  roadway  labor  and  miscella-  f 
neous  expense.                                           ( 

Paving  

Cleaning  and  sanding  track,  removing  / 
snow  and  ice                                              j 
Repairs,  tunnels  and  subways. 

Repairs,    elevated    structures,    bridges,  / 
trestles,  culverts                                       -f 
Repairs,  crossings,  fences,  signs,  signals,  ) 
interlocking,  telephones  and  telegraphs  \ 

Miscellaneous  way  expenses  < 

Repairs,    electric-line    poles,    conduits,  i 
distribution  system.                                   ) 
Miscellaneous  electric-line  expenses  

Repairs,  buildings  and  grounds  

Depreciation,  way  and  structures  

Balance,  expense  chargeable  to  way  and  ( 
structures.                                                 \ 

Superintendence,  equipment  \ 

Repairs,  revenue  cars  

Repairs,  service  cars  

Repairs,  car  electric  equipment  

Repairs,  locomotives,  floating  equipment,  > 
shop  equipment;  shop  expenses.             ) 

Expense  of  vehicles  and  animals  < 

Miscellaneous  equipment  expense  < 
Depreciation  and  retirement,  rolling  stock 

Balance,  operating  expenses  chargeable    \ 
to  maintenance  rolling  stock.                   ) 

222 


PUBLIC  UTILITY  RATES 


TABLE  ILLUSTRATING  TYPICAL  APPORTIONMENT  OP  ELECTRIC-RAILWAY  EXPENSE 

ACCOUNTS  AS  FIXED  OR  TERMINAL  AND  VARIABLE  OR  MOVEMENT  CHARGES: 

FOLLOWING  INTERSTATE  UNIFORM  SYSTEM  OP  ACCOUNTS.     Continued 


Account 
Number 

Description 

Fixed  % 

Variable  % 

45 
46 
47-48  j 
49 
50   | 

56  and  58 
52-57 
59 

60-62 

63 
64 
60-67  | 

68-69 
70-71 

72-73  \ 

74   { 

78 

Superintendence,  power  < 

According 
sionof  A 
80 

10 
100 
30 
10 

According 
sionof  A 
According 
sionof  A 

60 

80 
20 

100 

100 

Accordinj 
sionof  A( 

;  to  divi- 
icts.  46-62 
20 

90 

70 

90 
100 
100 
;  to  divi- 
3cts.  52-58 
5  to  divi- 
3cts.64-78 
100 

40 

20 
80 

;  to  divi- 
jcts.  64-74 

Repairs,  power  stations  and  substations.  . 
Repairs,  power  station  and  substation  ) 
equipment.                                                   ) 
Repairs,  transmission  system  

Depreciation   of  power  plants,   substa-  ) 
tions  and  transmission  system.                ) 
Power  plant  and  substation  supplies  

Power  plant,  fuel,  water,  oil,  labor.  .  .  . 

Purchased  power  

Balance,  power  exchanges,  etc.  .  .               s 

Superintendence,  transportation  < 

Platform  labor,  passenger  car  service  ...    . 

Miscellaneous  car  service,  labor  and  ex-  ) 
pense.                                                          ) 
Passenger  station  labor  and  expense  

Carhouse  labor  and  expense  

Operating  labor  and  supplies;    signals,  ) 
interlocking,     telephones     and     tele-  ? 
graphs.                                                          ) 
Labor   and   expense,    passenger   marine  I 
equipment  ) 

Miscellaneous  transportation  expense  .  .  .  ] 

79-80 
81 
82 

Solicitation  of  traffic  advertising  

Where  ac 

100 
missible 
100 
100 

Parks  and  resorts  < 

Miscellaneous  traffic  expense  .  .  

83 
84 
85 
86 

87-88 

89 

90 
91 
92 
93 
94 
95 

96 

97 
98 

99 

General  officers,  salaries  and  expenses.  .  .  . 
General  office  clerks,  salaries  and  expenses. 
General  office  supplies  

80 
70 
60 
100 
According 
sion  of  t 
and  sala 
According 
sionof  A< 
100 
100 

90 
20 
100 
According 
sionof  A( 
100 

According 
sionof  Ac 

20 
30 
40 

;  to  divi- 
otal  labor 
ries 
;  to  divi- 
jcts.  83-86 

100 
10 

80 

;  to  divi- 
;ets.20-37 

100 
;  to  divi- 
:cts.  83-98 

Legal  expenses  

Relief  department  expenses;  pensions..  .  < 
Miscellaneous  general  expenses  < 

Valuation  expense  

Amortization,  franchises  

Injuries  and  damages  

Insurance  

Printing  stationary,  tickets,  etc  

Storehouse  expense  

Garage  and  stable  expense  i 

Rental,  tracks  and  terminals  

Rental,  equipment  

Balance,  miscellaneous  operations  < 

RATE  PROBLEMS  OF  STREET  RAILWAYS  223 

Substituting  Car  Unit  for  Passenger.  —  Instead  of  using  pas- 
senger-miles in  the  foregoing  studies  of  fare  limits,  the  more  easily 
obtained  unit,  the  car-mile,  may  be  used.  The  fixed  charges 
do  not  depend  on  ultimate  service  —  length  of  car  trip  —  but 
can  be  apportioned  to  the  equipment  in  service  —  shown  by 
number  of  car  trips.  The  service  charges  do  depend  on  ulti- 
mate quantity  of  service  and  hence  are  apportioned  on  car-miles. 
If  the  average  revenue  per  car  trip  is  known,  deducting  the 
fixed  charges  per  trip  will  leave  a  sum  which  divided  by  the  car- 
mile  operating  cost  gives  the  length  of  haul  possible  with  profit. 
The  effect  of  a  change  in  fares  on  number  of  passengers  should 
be  studied  and  possibly  a  modified  calculation  made  of  earnings. 

Effect  of  Peak  Loads.  —  The  effect  of  high  or  low  load  factor 
-  that  is,  of  travel  in  off-peak  or  in  rush  hours  —  is  reflected  in 
the  fixed  costs  to  be  carried  by  a  passenger,  through  the  division 
of  some  important  items  according  to  utilization  of  equipment. 
It  is  also  reflected  in  the  operating  cost  per  passenger-  or  per 
car-mile  through  spreading  the  arbitrarily  split  expenses  over 
more  units.  The  ultimate  effect  of  good  load  factor  is  thus  made 
similar  to  the  case  of  utilities  where  peak  loads  directly  deter- 
mine participation  in  fixed  costs.  In  the  general  case  the  mini- 
mum or  ready-to-serve  charge  is  reduced  and  the  unit  operating 
cost  is  improved;  and  for  the  street  railway  the  length  of 
profitable  haul,  or  the  width  of  single-fare  zones,  is  increased. 

Reasonable  Length  of  Trips  on  Individual  Lines.  —  In  the 
foregoing  all  the  lines  have  been  aggregated  and  the  results 
as  to  length  of  haul,  etc.,  apply  as  an  average  over  the  system. 
In  many  cases  this  is  sufficient  but  in  others  —  notably  larger 
cities  and  suburban  lines  —  it  is  desired  to  treat  each  line  on 
its  merits.  To  do  this  the  costs  for  the  line  must  be  found. 
Where  possible  the  accounts,  of  course,  will  be  drawn  on  for  the 
apportionment,  but  this  is  more  apt  to  be  possible  on  the  subur- 
ban and  interurban  lines.  For  cities  it  is  more  often  necessary 
to  approximate  the  costs  by  applying  to  suitable  construction 
and  service  units,  the  fixed  and  variable  costs  for  such  units 
applying  to  the  whole  system  —  for  instance,  multiplying  a 
line's  miles  of  track  by  the  system's  fixed  costs  per  track  mile, 
and  the  actual  line's  car-miles  by  the  system's  service  cost  per 
car-mile,  or  using  whatever  units  best  fit  the  local  conditions. 

Having  located  the  fixed  and  service  costs  for  a  line,  and  know- 


224  PUBLIC  UTILITY  RATES 

ing  the  number  of  passengers  and  passenger-miles  on  the  line, 
makes  it  possible  to  treat  the  line  as  was  the  system.  That 
is,  the  minimum  charge  for  the  shortest  possible  ride  is  found; 
and  the  difference  between  this  and  the  unit  fare,  divided  by 
the  movement  cost  per  passenger-mile,  gives  the  length  of  ride, 
or  average  width  of  zone. 

Practical  Fixing  of  Zone  Fares.  —  An  extension  of  the  ideas 
involved  in  the  scrutiny  of  profitable  haul  on  individual  lines 
has  been  developed  *  for  fixing  actual  and  workable  zone  rates. 
Briefly  sketched,  the  process  starts  by  fixing  the  length  of 
zones,  arbitrarily  or  otherwise,  and  apportioning  the  fixed  and 
service  costs  on  the  basis  of  track-  and  car-miles  respectively, 
or  by  passengers  and  passenger-miles  after  a  traffic  census,  or 
by  car  trips  and  car-miles  on  the  record.  Then  various  rates 
of  fare  (a  fixed-cost  factor  plus  a  mileage  unit)  are  computed 
which  would  meet  the  cost  of  service.  These  are  applied  to 
the  traffic  found  in  the  zones  to  see  how  nearly  they  make  each 
zone  pay  its  own  costs.  Finally  such  practical  changes  are 
made  as  are  needed  to  present  the  most  convenient  and  accept- 
able provisions. 

Traffic  Surveys.  —  The  need  in  any  rate  case  of  specific  data, 
beyond  those  yielded  by  the  ordinary  records  of  the  company, 
have  been  evident  throughout  the  foregoing  discussions  —  in- 
formation for  instance  on  passengers  boarding  and  alighting 
all  or  typical  cars  at  various  points  from  hour  to  hour,  passen- 
gers on  each  car  at  maximum  load  points,  length  of  passenger 
travel,  etc.  The  questions  of  adequate  service  are  so  ultimately 
connected  with  fares  and  costs  that  most  surveys  of  notable 
value  have  been  much  more  comprehensive  than  the  cost  data 
alone  would  require  —  covering  number  of  persons  standing, 
number  of  empty  seats,  occupational  classes  of  passengers,  de- 
lays and  their  causes,  effect  of  weather,  of  municipal  events  and 
of  street  vehicles.  How  these  studies  may  be  made  suggests 
itself  by  a  survey  of  local  conditions  but  may  be  Understood 
by  scrutinizing  such  reports  as  those  of  B.  J.  Arnold  on  trans- 
portation problems  in  Chicago  (1902-'06-'08-'10-'11-'13), 
Pittsburg  (1910),  Providence  (1911),  San  Francisco  (1912-'13); 
of  Ford,  Bacon  and  Davis  on  Philadelphia  (1911);  of  A.  M. 
Taylor  on  Philadelphia  (1913);  Wisconsin  Railroad  Commission 

*  Doolittle,  "Cost  of  Urban  Transportation  Service,"  1916,  p.  256-263. 


RATE  PROBLEMS  OF  STREET  RAILWAYS  225 

on  Milwaukee  (1912  and  1913);    Barclay  Parsons  and  Klapp  on 
Detroit  (1915). 

Constitution  of  Good  Service.  —  The  several  city-transit  re- 
ports named,  and  other  similar  ones,  review  what  was  judged 
to  be  adequate  and  reasonable  service  for  the  place  and  time  - 
within  the  ability  of  the  people  to  support  it.  In  New  York 
City  sufficient  cars  are  required  in  any  15-minute  period  to 
provide  10%  excess  capacity  (or  failing  that  25  cars  per  hour  in 
each  direction);  and  no  less  than  6  per  hour  in  each  direction 
during  the  day  or  night.*  In  Milwaukee  f  a  headway  of  10 
minutes  in  non-rush  day  hours  was  required,  with  20  minutes 
at  night;  in  rush  periods  during  any  half  hour  seats  must  be 
provided  for  67%  of  the  passengers  offered  and  for  133%  in 
each  other  half ,  hour.  In  Providence  for  non-rush  hours  it  was 
recommended  that  each  20  minutes  should  see  as  many  seats  as 
passengers;  for  rush  hours,  seats  for  50%  of  the  offered  passen- 
gers.f 

The  reasonableness  of  demands  for  a  particular  degree  of 
service  cannot  be  wholly  judged  on  the  comfort  and  convenience 
of  the  riders,  for  this  may  depend  largely  on  the  location  and 
practices  of  industries,  local  customs  and  topography,  city  plan, 
etc.,  —  matters  beyond  the  control  of  a  traction  company. 
Any  study  of  reasonable  service  must  include  the  cost  effects. 
For  example  if  it  were  physically  possible  to  operate  over  a 
system's  tracks  cars  enough  to  provide  seats  for  all  rush-hour 
passengers  it  might  cost  so  much  more  that  the  company  would 
face  a  serious  deficit.  The  motormen  and  conductors  would  all 
have  to  get  pay  for  a  full  day's  work,  and  some  cars  would  not 
be  needed  but  an  hour  or  two  out  of  the  day;  both  fixed  and 
movement  costs  per  car  trip  would  be  too  great  for  the  traffic 
to  support. 

Contrasts  Between  Old  and  Present  Costs.  —  In  place  of  the 
light  track  construction  already  described  for  the  early  days 
of  street  railways,  today  the  rails  weigh  from  70  to  120  Ib. 
per  yard  and  are  laid  on  heavy  ties,  6  X  8  in.  X  8  ft.,  2  ft.  apart 
and  ballasted  with  rock  or  gravel  or  bedded  in  concrete.  In 

*  N.  Y.  Public  Service  Comm.  First  Dist.,  Rep.,  1908-10. 
t  Milwaukee  Suburban  Fares,  13  Wis.  R.  R.  Comm.  Rep.  245. 
t  B.   J.   Arnold,    "Traction   Improvement  and   Development  in  Provi- 
dence District,"  1911. 


226  PUBLIC  UTILITY  RATES 

streets,  paving  between  rails  and  for  1  to  2  feet  on  each  side  is 
required  —  of  granite,  brick  or  wood  block.  The  whole  cost 
today  is  in  the  order  of  $15  to  $20  per  yard  compared  with  $3 
to  $6  at  first. 

The  cost  of  a  bobtail  horse  car  and  horses  was  some  $2500, 
while  a  modern  electric  car  runs  from  $5000  to  $12,000.  The 
cost  of  light  track  alone,  where  no  paving  or  similar  street  im- 
provement is  involved,  runs  to  $25,000  per  mile;  in  cities  it  may 
be  $40,000  —  in  both  cases  without  rolling  stock,  power  plants, 
etc.  According  to  the  1912  U.  S.  Census  of  the  industry,  the 
average  cost  per  mile  of  equipped  American  electric  railways 
has  gone  from  $48,000  in  1890  to  $96,000  in  1902  and  $113,600 
in  1912.  This  rise  has  been  due  not  only  to  the  heavier  equip- 
ment but  to  increased  cost  of  work  in  streets  due  to  pipes,  sewers 
and  conduits,  grade  crossing  elimination  on  interurban  lines, 
etc.  There  has  been  some  effect  too  on  the  census  data  from 
expensive  subway  work  in  Boston,  New  York  and  Philadelphia. 

There  has  been  a  marked  tendency  for  taxes  on  electric  rail- 
ways to  increase;  according  to  the  1912  Census  the  taxes  on 
operating  and  lessor  companies  in  1902  was  4.8%  of  gross  earn- 
ings and  5.6%  in  1912.  This  is  due  probably  to  the  continu- 
ation of  a  movement  which  antedates  the  now  popular  commis- 
sion regulation  and  which  aimed  to  secure  for  the  public  a  share 
of  the  profits  of  public  monopolies.  It  was  in  effect  an  attempt 
at  regulation  —  which  however  has  now  no  place  alongside  com- 
mission supervision. 

The  growth  in  taxation  has  been  nominally  about  16%  but 
actually  the  effect  has  been  greater,  for  the  operating  expenses 
of  the  roads  have  climbed  meanwhile,  and  the  unit  fare  has  re- 
mained the  nickel.  Longer  rides,  more  transfers,  greater  in- 
terest rates  on  bonds,  etc.,  have  conspired  to  heighten  the  ac- 
tual burden  of  taxation  on  net  income. 

Wages  of  trades  most  involved  have  risen  some  35%  over  the 
figures  for  1890-1900  *  keeping  pace  with  the  cost  of  family 
living.  Prices  of  materials  of  repair  by  July,  1916,  had  gone 
up  over  the  average  for  the  1 890^1 900  decade  approximately  as 
follows:  10%  for  metals,  11%  for  paints,  13%  for.  building 
materials,  16%  for  tools,  50%  for  coal,  and  57%  for  lumber. 

*  A  more  detailed  study  of  various  authorities  on  such  points  is  given  in 
Doolittle's  "Cost  of  Urban  Railway  Transportation." 


RATE  PROBLEMS  OF  STREET  RAILWAYS  227 

Depreciation  of  Electric-railway  Property.  —  The  sacrifice  of 
investment  in  street-railway  properties  experienced  up  to  1900 
was  perhaps  more  by  obsolescence  than  by  deterioration  —  and 
unfortunately  the  need  of  making  good  this  loss  out  of  the 
current  earnings  was  realized  too  late.  From  1900  to  1910, 
there  was  still  some  loss  by  obsolescence  but  a  greater  part  by 
deterioration.  Since  1910  there  has  been  comparatively  little 
change  in  the  industry  as  a  whole  and,  consequently,  only  small 
loss  by  pure  obsolescence. 

Prior  to  1900  there  was  the  progressive  scrapping  of  horse 
cars  and  light  railway  track,  cable  cars  and  conduit,  and  all 
the  early  experimental  electrical  equipment  before  standard- 
ization set  in.  In  the  decade  1900-1910  the  obsolescence  was  due 
to  discard  of  medium-weight  track  and  single-track  cars  in  those 
localities  where  heavier  traffic  developed  —  or  was  hoped  for. 
In  this  period,  too,  came  the  prepayment-type  of  car  and  the 
greater  use  of  steam  turbines  in  place  of  reciprocating  engines 
for  prime  motive  power. 

A  well-kept  modern  electric  railway  —  city,  suburban  or  interur- 
ban  —  should  show  on  examination  that  its  physical  property  is 
worth  about  85%  the  first  cost  of  all  the  several  items  which  can 
be  inventoried.  That  takes  no  account  of  big  works  which  have 
been  discarded  and  disappeared  from  the  sight  of  the  appraiser. 

There  is  some  chance  that  where  adequate  records  have  been 
kept  of  the  companies'  investments  and  supersessions  of  appa- 
ratus it  may  still  be  possible  to  recover  some  of  the  money  spent 
in  good  faith  but  unproductively.  Such  treatment  is  to  be 
seen  in  the  bond  issues  of  the  Binghamton  company  approved 
in  April,  1916,  by  the  New  York  Public  Service  Commission, 
Second  District.  Out  of  a  total  of  $1,000,000,  some  $100,000 
went  for  improvements  and  the  rest  to  fund  a  floating  debt  — 
which  funded  debt,  however,  is  to  be  carried  in  a  suspense  ac- 
count with  at  least  $7500  paid  back  to  bondholders  each  year. 
But  for  the  most  part  all  such  developments  expenses  are  now 
pure  conjecture  and  more  than  apt  to  be  ruled  out  by  commis- 
sion and  court,  on  the  argument  also  that  the  early  ventures 
were  largely  speculative  —  the  early  investors  taking  great  risks 
and  expecting  great  profits. 

Securing  Retirance.  —  In  the  street-railway  industry  at  the 
present  moment  it  does  not  seem  feasible  to  establish  any  one 


228  PUBLIC  UTILITY   RATES 

single  way  of  treating  depreciation  of  properties  and  its  com- 
pensation —  what  has  here  before  been  called  retirance.  A  com- 
bination of  methods  seems  desirable  —  though  they  may  all 
be  regarded  as  of  the  direct-repayment  type  discussed  before 
(see  Chapter  VIII).  First  a  study  of  the  property,  records  and 
accounts  may  establish  satisfactorily  the  accumulated  losses 
due  to  obsolescence,  inadequacy,  etc.,  which  have  never  been 
made  good  out  of  earnings  and  which  properly  may  enter  the 
capitalization,  or  rate-basis  worth,  as  part  of  the  business 
development  —  unless  that  element  has  been  computed  in  such 
a  way  that  this  brings  duplication.  It  may,  in  many  cases, 
prove  better  to  put  such  losses  of  capital  into  a  suspense  ac- 
count which  is  reduced  by  contributions  out  of  earnings,  as  in 
the  Binghamton  case  already  noted. 

Then  there  is  a  second  element  of  depreciation  to  be  observed 
—  an  annual  wear-deterioration  that  is  made  good  by  the  re- 
placement in  course  of  general  maintenance  —  of  wires,  supports, 
rails,  ties,  poles,  paving,  and  the  other  small  units  which  exist 
in  great  quantities  in  all  stages  of  life.  This  variety  of  retir- 
ance is  well  covered  by  the  cost  of  maintenance  and  at  the 
present  time  in  most  cases  there  appears  no  necessity  of  compli- 
cating the  records  by  separate  accounts.  (It  should  be  noted, 
however,  that  some  parts  of  trackwork  like  special  work  in  cities 
which  is  heavy,  expensive  and  not  duplicated,  or  like  granite- 
block  paving  on  concrete  foundations,  may  require  little  re- 
newal from  year  to  year  but  will  demand  replacement  in  large 
amounts  after  few  years.  This  sort  of  retirance  then  is  better 
cared  for  as  noted  in  the  next  paragraph.) 

There  is  finally  that  sort  of  depreciation  and  retirance  which 
have  been  most  discussed  among  utility  men  —  those  on  large 
important  items  slowly  wearing  out  or  become  antiquated. 
This  retirance  is  to  be  secured  by  one  of  the  sanctioned  plans 
which  deducts  proper  sums  from  the  earnings  —  preferably  the 
concave-curve  scheme  or  straight-line  plan,  depending  on  the 
extent  to  which  depreciation  causes  an  increase  in  operating 
cost  or  a  decrease  in  capacity  and  efficiency.  In  this  class 
is  the  retirance  on  cars,  power  plants,  barns,  shops,  stations, 
etc. 

In  a  few  roads  of  normal  condition  and  history  where  re- 
tirance is  handled  on  some  such  basis,  there  is  a  direct  repay- 


RATE  PROBLEMS  OF  STREET  RAILWAYS  229 

ment  equal  to  some  4%  of  the  gross  annual  earnings.  Retir- 
ance  covered  up  in  maintenance  and  repairs  may  amount  to 
6  of  the  10%  of  gross  earnings  needed  for  this  item.  The 
item  of  compensation  for  old  obsolescences,  or  reductions  of 
a  suspense  account,  may  reasonably  take  3%  in  good  years  if 
it  can  be  secured.  Expressed  in  terms  of  physical  property 
value  —  not  necessarily  full  rate-basis  worth  —  the  4%  of  gross 
earnings  becomes  some  1.0%,  the  6%  becomes  1.5%  and  the 
3%  becomes  0.75%  —  the  total  amounting  to  3.25%  —  of  the 
physical  value.  This  would  appear  to  be  an  altogether  too  small 
sum  to  accord  with  experience  in  other  utilities  as  to  what  con- 
stituted safe  financing;  that  some  of  these  companies  are  safe  is 
due  to  other  appropriations  going  back  into  the  property  - 
extensions,  surplus  funds,  etc.,  amounting  to  another  1  or  2% 
in  good  properties. 

Because  of  the  great  changes  in  the  technique  of  street-rail- 
way construction  and  operation  in  the  various  decades  up  to 
1910,  it  is  obvious  that  life-experience  tables  of  electric  rail- 
way apparatus  are  of  much  less  value  in  the  study  of  depre- 
ciation and  retirance  here  than  the  life-experience  tables  which 
may  be  used  in  some  of  the  other  utilities  which  have  become 
more  stabilized  technically  —  water-works  particularly.  The 
divergences  of  experience  and  conditions  like  climate,  degree  of 
maintenance,  adequacy,  quality  of  labor,  public  demands,  earn- 
ings, etc.,  are  marked,  not  only  between  different  companies 
but  for  a  single  company  *  so  that  no  conclusions  can  be  drawn. 
On  the  other  hand  there  is  the  quoted  experience  of  bodies  like 
the  Wisconsin  Railroad  Commission's  Engineering  Department 
that  their  life  tables,  carefully  handled  and  regarded  more  as 
bases  for  departure  in  specific  cases,  are  most  useful. 

Rapid  Transit  and  Rates.  —  As  cities  grow  and  develop  more 
or  less  extensive  districts  of  concentrated  business,  the  appear- 
ances of  traffic  congestion  multiply  and  the  time  of  transit  be- 
tween homes  and  places  of  work  lengthens.  Then  the  more 
thoughtful  citizens  begin  to  consider  the  possibility  of  sub- 
ways —  the  appeal  of  elevated  lines  at  present  not  being  great 
in  the  absence  of  experience  with  heavy  masonry  (concrete) 

*  Reports  of  Joint  Committee  on  Life  of  Railway  Physical  Property, 
American  Electric  Railway  Engineering  and  Accountants  Associations, 
1911-12-13. 


230  PUBLIC  UTILITY  RATES 

viaducts  and  rock-ballasted  tracks  on  steel  structures.  If  they 
are  well  advised  they  soon  see  that  the  feasibility  of  a  rapid- 
transit  line  or  system  of  lines  depends  on  the  fares  which  the 
riders  are  willing  to  pay  for  the  saving  in  time  or  the  personal 
convenience.  They  find  that  it  is  only  in  the  places  of  greatest 
population  or  with  peculiar  geographical  arrangements  that 
rapid  transit  is  possible  for  surface-car  fares  or  that  the  city's 
commercial  development  is  hampered  by  the  lack  of  a  rapid- 
transit  system.  The  citizens  have  to  realize  soon  that  common- 
fare  operation  becomes  possible  only  where  the  density  of  traffic 
probably  will  decrease  the  operating  cost  per  passenger  trip 
enough  to  make  up  the  interest  on  large  investment.  How 
much  this  saving  must  be  is  seen  after  noting  that  the  cost  of 
a  rapid-transit  line  will  be  from  $60,000  to  $2,500,000  per  mile 
more  than  an  ordinary  city  surface  line  (experience  showing  the 
order  of  costs  as  $40,000  per  mile  for  the  surface  line,  without 
rolling  stock;  $120,000  for  the  steel  elevated  line;  $330,000  for  the 
concrete  viaduct;  $220,000  for  an  open-cut  railway;  $400,000  to 
$1,200,000  per  mile  for  the  subway  — depending  on  the  difficulty 
of  excavation  and  the  interference  with  traffic;  and  $2,700,000 
for  subaqueous  tunnels).  To  make  a  $500,000-per-mile  rapid- 
transit  line  pay  (including  return  on  extra  investment  in  rolling 
stock  and  other  necessary  operating  equipment)  would  require 
4300  passengers  per  working  day  for  each  mile  of  line.* 

The  principles  of  rapid-transit  planning  have  been  well  sum- 
marized in  the  following  seven  paragraphs.! 

1.  Locate  rapid-transit  lines  in  general  along  direct  routes  where  the 
congestion  has  become  too  great  for  surface  lines  to  run  at  fair  speed 
and  properly  to  take  care  of  the  traffic;  the  main  object  of  rapid-transit 
lines  in  a  unified  system  is  to  supplement  the  surface  car  service  by 
removing  therefrom  a  large  part  of  the  passenger  traffic  and  placing  this 
traffic  above  or  below  the  street  level  where,  being  free  from  interference 
with  other  traffic,  much  higher  speed  can  be  maintained  and  larger  and 
heavier  trains  operated. 

2.  Construct  each  line  in  progressive   steps,   completing    the  most 

*  From  figures  in  "Provision  for  Rapid  Transit  in  Cities,"  a  paper  by 
J.  V.  Da  vies  before  the  National  Conference  on  City  Planning;  see  Engineering 
News,  June  11,  1914. 

t  W.  S.  Twining,  "The  Problem  of  Passenger  Transportation  in  Phila- 
delphia," a  report  to  the  Select  and  Common  Councils,  March  29,  1916. 


RATE  PROBLEMS  OF  STREET  RAILWAYS  231 

urgently  needed  section  first  and  adding  extensions  or  branches  only  as 
their  necessity  or  feasibility  is  demonstrated. 

3.  Plan  the  system  as  a  comprehensive  whole  conforming  to  the  ideal 
plan  as  nearly  as  local  conditions  permit  and  with  the  underlying  idea 
of  operating  all  trains  on  the  principle  of  through-routing  as  far  as  pos- 
sible, as  this  is  now  universally  conceded  to  be  the  proper  method  of 
operation.    Avoid  the  so-called  "  looping  •'  method  of  operation  wherever 
possible. 

4.  Construct  the  minimum  amount  of  subway  line,  as  this  is  the  most 
expensive  form  of  construction  and  hence  carries  the  highest,  interest  charge 
per  mile.    As  a  corollary  of  this,  subways  should  be  built  only  where  no 
other  form  can  be  used  or  accepted  on  account  of  high  property  damages 
resulting  from  the  use  of  any  other  form,  or  for  esthetic  reasons,  or  where 
some  special  or  peculiar  conformation  of  the  streets  makes  a  subway  im- 
perative. 

5.  Construct  rapid-transit  lines  to  only  such  points  in  the  outlying 
districts  as  will  provide  sufficient  traffic  to  load  the  lines  to  an  economical 
amount.     Beyond  such  points  the  traffic  should  be  carried  by  either 
surface  lines  or  by  other  cheaper  forms  of  high-speed  construction. 

6.  Locate  rapid-transit  lines  in  the  business  district  so  they  will  act  as 
channels  through  which  the  main  traffic  flow  between  the  residential 
and  business  districts  may  be  conveyed  without  confusion  or  congestion, 
and  so  as  to  require  a  minimum  of  transferring  to  reach  the  rider's  desti- 
nation. 

7.  Utilize  existing  surface  car  facilities  to  the  fullest  extent  possible 
and  supplement  them  by  high-speed  surface  extensions  into  the  sub- 
urbs, located  on  wide  streets  or  private  right-of-way  so  as  to  provide 
economically  for  the  development  of  the  territory  adjacent  or  tributary 
to  the  rapid-transit  lines. 

It  is  true  in  general  that  before  subways  are  profitable  every 
resource  of  police  power  for  the  regulating  and  routing  of  traffic 
will  have  to  be  exhausted.  After  that,  it  is  probable  that  com- 
paratively short  elevated  or  subway  routes  for  surface  cars 
across  congested  districts  will  prove  the  economical  first  step 
in  reducing  the  delays  and  operating  costs.  The  revision  of  the 
Newark  (N.  J.)  lines  of  the  Public  Service  Ry.  is  an  example  of 
this  action.*  Here  very  short  subway  and  elevated  lines  lead  to 
a  three-deck  exchange  station.  The  first  cost  of  a  railway  ter- 
minal (which,  as  a  rule,  is  too  heavy  a  burden  for  economy)  is 
here  diminished  by  the  superposition  of  a  much-needed  huge  office 
building  on  the  terminal  structure. 

*  See  Engineering  News,  Oct.  7  and  28,  1915. 


232  PUBLIC  UTILITY  RATES 

The  Transfer  Problem.  —  The  extensive  use  of  transfer  tickets 
-enabling  passengers  to  complete  their  journeys  over  various  routes 
for  the  original  fare  has  become  one  of  the  pressing  problems  of 
street-railway  operation.  The  transfer  ticket  was  at  first  highly 
regarded  by  street-railway  managers  (as  the  proceedings  of  early 
conventions  of  street-railway  men  show)  as  a  device  which  con- 
tinued the  attractions  of  a  multiplicity  of  old  single-fare  through 
routes  without  the  necessity  of  continuing  an  expensive  and 
complicated  schedule  of  tortuous  trips  after  the  consolidation  of 
several  lines.  It  was  believed  that  the  use  of  transfers  would 
stimulate  traffic  —  and  undoubtedly  it  had  and  still  has  a  cer- 
tain effect.  But  with  the  increasing  costs  of  electric-railway 
operation  the  transfer  came  to  be  more  and  more  frowned  on 
by  railway  officials  as  a  device  that  strings  out  the  ride  beyond 
the  ever  shortening  length  that  a  nickel  will  profitably  cover, 
and  in  many  cases  that  gives  one  fare  when  two  would  other- 
wise be  yielded.  The  possibilities  of  abuse  too  have  proved 
considerable. 

Yet  a  considerable  part  of  the  hostility  toward  free  transfers 
has  been  due  to  its  statistical  effect  —  which  perhaps  exagger- 
ates its  economic  disadvantages.  If  a  "  passenger "  is  con- 
sidered as  any  person  who  boards  any  car  at  any  point,  irre- 
spective of  origin,  destination,  route  or  length  of  ride,  then  it  is 
obvious  that  the  total  cash  fares  collected  divided  by  the  aggre- 
gate number  of  "  passengers  "  will  result  in  showing  an  average 
revenue  unit  or  fare  of  less  than  a  nickel  —  4j£,  ?>i  or  even  less. 
Such  a  statement  is  naturally  alarming  to  a  manager  and  ought 
to  be  at  least  significant  to  an  intelligent  public.  Its  harm  and 
exaggeration  arises  from  its  lack  of  significance  standing  alone 
and  the  distraction  it  induces  from  the  main  issue  —  cost  of 
carrying  a  passenger.  Such  a  diluted  average  fare  becomes 
significant  only  when  stated  beside  the  cost  of  the  average  trip 
taken  by  the  "  passenger."  If  the  fare  is  diluted  by  dividing 
the  cash  collection  by  total  number  of  boarders  it  is  obvious  that 
the  cost  per  passenger  trip  should  be  also  diluted,  the  terminal 
costs  being  distributed  over  more  persons  and  the  movement 
costs  being  divided  a  greater  number  of  shorter  rides.  This 
dilution  of  cost  figures  is  apt  to  give  a  misconception  of  unit 
cost  per  paying  passenger  for  it  is  logical  to  assess  each  paying 
passenger  with  fixed  costs  only  once  —  whether  he  transfers  or  not. 


RATE  PROBLEMS  OF  STREET  RAILWAYS  233 

The  transfer  problem  then  should  not  be  a  distinct  problem; 
it  should  be  another  phase  of  the  vital  problem  of  making  the 
average  ride  over  the  system,  or  perhaps  on  each  line  thereof, 
approximately  not  greater  than  the  profitable  distance. 

Attempts  to  cut  off  transfers,  instead  of  general  equitable  re- 
striction of  trip  length  over  all  routes,  is  sure  to  arouse  greater 
hostility  and  to  result  in  an  irritating  impression  of  a  discrimi- 
nation whereby  passengers  on  through  routes  are  to  be  carried 
further  for  a  single  fare  than  those  who  have  to  suffer  the  in- 
convenience of  change  in  order  to  get  to  their  destination. 
The  actual  curtailment  of  transfer  privileges  in  many  situations 
is  apt  to  cause  a  demand  for  multiplicity  of  through  routes 
which  may  not  be  economical. 

One  significance  of  a  heavy  statistical  dilution  of  unit  fares 
by  transfer  "  passengers  "  is  that  there  may  be  a  heavy  transfer 
movement  which  could  be  economically  handled  by  through 
routing  of  some  cars  or  revising  the  main  trunk  route.  Such 
a  reduction  of  transfers  reduces  expense  through  delays,  stops 
(which  affect  minor  repairs  and  renewals),  injuries,  etc. 

Jitney-bus  Competition.  —  No  other  one  phenomenon  in  elec- 
tric-railway operation  has  raised  any  such  tempest  as  has  the 
competition  of  the  small  motor  cab  or  bus — the  "  jitney." 
Crazes  for  jitney  riding  seem  to  have  possessed  large  parts  of 
the  riding  public  in  some  cities  for  a  time,  and  distracted  railway 
officials  have  seen  ruin  staring  out  of  their  shrunken  gross  earn- 
ings. At  this  early  date,  when  the  jitney  is  only  a  couple  years 
old,  it  is  not  possible  clearly  to  foresee  its  future  position;  how- 
ever, as  far  as  costs  show,  the  jitney  may  be  expected  to  be  more 
of  a  short  acute  attack  than  a  chronic  continued  disease.  Such 
cost  figures  on  the  operation  of  light  automobiles  as  are  commonly 
available  leads  to  the  expectation  that  a  free-lance  owner-driver 
will  have  an  actual  cash  expenditure  so  nearly  approaching  his 
maximum  possible  revenue  that  he  can  earn  only  a  motorman's 
wage  for  a  long  day's  work  —  and  that  after  neglecting  interest 
on  his  small  investment,  depreciation,  etc.  Where  a  company 
operates,  say  50  to  100  jitneys,  the  stated  costs  rise  above  the 
expenditures  of  the  free-lance,  for  hired  men  do  not  work  as 
long  hours,  the  repairs  are  made  by  a  special  force,  and  interest 
is  not  neglected.  Jitney  companies  are  not  inviting  prospects 
and  the  continuance  of  this  type  of  service  seems  to  depend, 


234  PUBLIC  UTILITY  RATES 

each  year,  on  a  fresh  crop  of  enthusiastic  owner-drivers  —  each 
with  an  investment  of  a  few  hundred  dollars  which  he  may 
sacrifice. 

The  appeal  of  the  jitney  bus  comes  from  its  fair-weather  ad- 
vantages under  light  traffic  —  smoother  carriage,  better  air, 
higher  speeds,  and  fewer  stops.  It  is  obvious  that  if  a  two-mile 
trip  is  made  by  an  automobile  with  four  passengers  and  a  40- 
seat  filled  car,  there  may  be  up  to  ten  times  as  many  stops  by  the 
car  as  by  the  auto  —  a  matter  affecting  the  comfort  of  the  long- 
est riders,  and  the  speed  of  the  journey. 

Cleveland  3£  Fare  Campaigns.  —  The  street-railway  system  of 
Cleveland,  Ohio,  is  unique  among  American  roads  in  its  oper- 
ating arrangements  and  no  review  of  street-railway  rates  and 
services  would  be  complete  without  calling  attention  to  it.  The 
events  of  1903-1910  leading  up  to  the  change  have  become 
historical  and  only  the  briefest  review  is  needed  to  show  the 
development  of  the  present  plan. 

One  Tom  L.  Johnson  was  elected  in  1903  on  a  platform  of 
3f£  fares,  competing  railways,  universal  transfers  and  eventual 
municipal  ownership.  Immediately  there  started  a  most  tangled 
series  of  moves  on  the  part  of  every  interest  involved.  Some 
of  the  franchises  of  the  old  concern,  the  Cleveland  Electric 
Railway  Co.,  were  expiring,  and  renewals  and  rights  for  ex- 
tended lines  were  desired.  In  response  to  the  mayor's  appeal  the 
company  tried  3^  and  4jzf  fares  without  transfers  on  several 
lines  and  reported  the  earnings  insufficient.  A  rival  enterprise, 
the  Forest  City  Street  Ry.  Co.,  and  its  successor,  the  Municipal 
Traction  Co.,  had  secured  franchises  but  the  courts  prevented 
any  great  utilization  of  the  rights  granted.  There  were  pro- 
posals and  counter-proposals,  injunction  suits,  spectacular  at- 
tempts to  secure  possession  of  streets,  contempt-of-court  pro- 
ceedings, etc.  No  real  progress  was  evident,  however. 

In  1907  Johnson  ran  for  office  again  —  and  on  a  3^-fare.  plat- 
form —  winning  the  race.  Shortly  after,  the  old  company  agreed 
to  certain  of  his  proposals,  became  the  Cleveland  Railway  Co., 
and  leased  its  lines  to  the  Municipal  Traction  Co.,  under  a  6% 
guaranteed  dividend.  A  city  fare  of  3^  with  1^  for  transfers 
was  put  into  effect.  Consequent  reductions  of  service  caused 
such  dissatisfaction  that  the  whole  arrangement  was  upset 
again,  the  Municipal  Traction  Co.  going  into  receivers'  hands. 


RATE  PROBLEMS  OF  STREET  RAILWAYS  235 

By  court  orders  the  maximum  fares  allowed  in  the  franchises 
were  put  on  —  5^  on  some  lines  and  3^  on  others.  Suburban 
fares  remained  at  5£.  Various  attempts  were  made  to  force 
the  Cleveland  Railway  Co.  to  accept  a  franchise  providing  for 
4ff  fares,  a  revaluation  of  property,  arbitration  of  disputes, 
right  of  city  to  name  a  purchaser,  city  control  of  operation, 
appointment  of  a  city  railway  commissioner  to  be  paid  by  the 
company.  The  company  balked  at  some  of  these  steps  but 
negotiations  proceeded  and  finally  the  troublesome  points  - 
maximum  fare  and  valuation  —  went  to  Judge  Tayler  of  the 
U.S.  Circuit  Court,  as  arbitrator.  While  the  arbitrator  was  con- 
sidering the  case,  Johnson  was  defeated  in  his  third  campaign 
for  the  mayoralty,  but  the  arbitrator's  report  was  made,  the 
ordinance  was  passed  in  December,  1909,  and  accepted  before 
the  new  administration  came  in.  It  was  approved  by  referen- 
dum in  February,  1910. 

Cleveland  City-Control  Ordinance.  —  The  1909  settlement 
ordinance  (commonly  known  around  the  country  as  the  "  Tayler 
Ordinance  ")  was  designed,  in  the  language  of  the  statute,  to 

secure  to  the  owners  of  property  invested  in  street  railroads  security 
as  to  their  property,  and  a  fair  and  fixed  rate  of  return  thereon,  at  the 
same  time  securing  to  the  public  the  largest  powers  of  regulation  in  the 
interest  of  public  service,  and  the  best  street-railroad  transportation  at 
cost  consistent  with  the  security  of  the  property,  and  the  certainty  of  a 
fixed  return  thereon,  and  no  more. 

The  railway  company  by  this  scheme  operated  the  property 
and  the  City  prescribed  the  service  through  the  Council  and  the 
Railway  Commissioner.  The  fare  was  started  in  the  middle 
of  a  sliding  scale  at  3^  cash  with  1^  for  transfer  without  rebate. 
Revenues  were  credited  to  an  "  interest  fund  "  established  at 
$500,000  to  start  with  by  a  company  payment.  The  company 
was  allowed  for  maintenance,  depreciation  and  renewals,  4^ 
per  car  mile  in  January,  February,  March,  April,  May  and 
December;  5j£  in  November;  and  6^  in  June,  July,  August, 
September  and  October.  For  operation  the  allowance  was  11  A£ 
per  car  mile.  Interest  on  funded  debt  was  allowed  as  paid. 
From  the  interest  fund,  each  month  a  proper  portion  of  6%  per 
year  on  the  valuation  was  drawn.  If,  after  8  months'  trial,  the 
interest  fund  rose  to  over  $700,000,  a  lower  rate  of  fare  was  to 


236  PUBLIC  UTILITY  RATES 

go  into  effect  and  if  the  fund  sank  below  $300,000,  a  higher  rate 
was  to  be  permitted.     The  sliding  scale  of  fares  was  as  follows: 

(a)  4ff  cash,  7  tickets  for  25  ff,  Iff  transfer,  no  rebate; 

(6)  4ff  cash,  7  tickets  for  25 £,  Iff  transfer,  Iff  rebate; 

(c)  4ff  cash,  3  ticket  for  10  ff,  Iff  transfer,  no  rebate; 

(d)  4ff  cash,  3  tickets  for  10  ff,  Iff  transfer,  Iff  rebate; 

(e)  3ff  cash,  Iff  transfer,  no  rebate; 
(/)  3ff  cash,  Iff  transfer,  Iff  rebate; 

(g)  3 £  cash,  2  tickets  for  5ff,  Iff  transfer,  no  rebate; 

(K)  3ff  cash,  2  tickets  for  5?f,  Iff  transfer,  Iff  rebate; 

(i)  2ff  cash,  Iff  transfer,  no  rebate; 

(j)  2ff  cash,  Iff  transfer,  Iff  rebate. 

The  first  eight  months  (to  Nov.  30,  1910)  showed  an  increase 
of  $50,000  in  the  interest  fund  so  that  the  first  fares  (at  e  in 
the  sliding  scale)  were  held  to.  In  May,  1911,  the  Railway 
Commissioner  found  the  interest  fund  $200,000  high,  and  the 
Council  decreased  the  fare  by  one  step  (to  /).  This  continued 
up  to  Sept.  1,  1914,  when  fares  were  raised. 

Meantime  the  allowances  of  the  ordinance  for  operating  ex- 
pense, and  for  maintenance  and  renewals  had  proved  insuffi- 
cient so  that  deficits  had  been  created  in  these  departments  in 
spite  of  a  growing  interest  fund  which  called  for  lower  fares. 
The  City,  nevertheless,  demanded  still  lower  fares  and,  under 
a  wise  provision  of  the  ordinance,  the  dispute  went  to  a  board 
of  three  arbitrators.  These  men  reported  after  due  deliberation 
that,  in  the  three  years'  operation  to  Feb.  28,  1913,  there  had 
accumulated  a  necessary  over-expenditure  of  $259,593  for  oper- 
ation,—2.63%  on  an  allowance  of  $9,860,816.  The  over-ex- 
penditure for  maintenance  was  $323,597,  — 7.8%  on  $4,155,459. 
The  arbitrators  recommended  that  the  operating  allowance  be 
increased  from  11.5  f£  to  I2.l£  per  car  mile.  The  accumulated 
operating  deficit  they  recommended  should  be  taken  from  the 
interest  fund  at  once.  No  added  annual  allowance  for  main- 
tenance was  granted,  although  the  deficit  had  included  no  figure 
for  retirance  on  long-lived  property.  The  maintenance  deficit 
was  to  be  cared  for  by  such  occasional  drafts  on  the  interest 
fund  as  would  not  draw  it  down  below  $400,000. 

There  had  accumulated  surpluses  in  the  accounts  for  insur- 
ance and  for  injuries  and  damages  amounting  to  $63,049  and 
$152,954.  The  arbitrators  found  that  unexpected  balances  of 


RATE  PROBLEMS  OF  STREET  RAILWAYS  237 

allowances  for  insurance  and  injuries  and  damages  should  have 
been  annually  credited  to  the  interest  fund. 

The  several  findings  of  the  board  were  put  into  effect  by  the 
City  Council,  the  Railroad  Commissioner  and  the  company. 
The  low  fare  of  3^  with  1^  for  transfer  has  been  continued 
through  an  unusual  cooperation  of  Council,  people  and  company 
to  keep  costs  down,  although  the  service  is  better  than  in  many 
other  cities  of  the  country.  The  topography  and  arrangement 
of  residential  districts  is  favorable.  Shortened  routes  are  per- 
mitted, to  concentrate  crowds  for  longer  distances  and  to  increase 
car  intervals  on  longer  lines.  Cars  do  not  stop  at  all  streets, 
which,  together  with  use  of  trailers  and  special  loading  methods, 
gives  some  20%  faster  schedules  than  seen  in  other  American 
cities.  The  speedy  loading  is  secured  by  running  cars  so  far  as 
possible  on  a  pay-as-you-leave  scheme  outbound  and  pay-as- 
you-enter  coming  back.  Special  rolling  stock  favors  such  oper- 
ation. Police  control  of  vehicular  street  traffic  is  strict.  All 
of  the  lines  (16)  radiate  from  the  commercial  center  of  the  city 
and  most  cars  go  around  some  one  of  several  loops  in  this 
district. 

Objections  to  the  Cleveland  Scheme.  —  Electric-railway  men 
outside  of  Cleveland  who  have  examined  the  operation  in  de- 
tail are  not  satisfied  that  it  should  be  copied  elsewhere.  The 
arguments  of  the  rest  of  the  industry  to  it  are:  (1)  rigid  spe- 
cific allowances  for  operation  and  maintenance  are  insufficient, 
(2)  there  are  no  damage  and  insurance  reserve  funds,  (3)  depre- 
ciation is  not  cared  for  adequately,  (4)  the  fixed  rate  of  return 
(6%)  is  too  small  to  attract  capital,  (5)  the  extension  of  lines 
is  checked,  (6)  the  service  is  below  the  Wisconsin  Commission's 
standards,  etc. 

Milwaukee  Zone  System.  —  For  two  years  a  well-planned 
zone  system  of  fares  has  been  in  force  on  the  lines  of  the  Mil- 
waukee Electric  Ry.  and  Light  Co.,  apparently  working  well, 
and  certainly  better  than  the  old  rate  system  before  in  effect. 
Before  the  new  system  became  effective  there  had  been  5^  zones 
of  0.99  to  7.17  miles  length  depending  on  boundaries  fixed  by 
franchises  or  concessions.  Various  overlaps  had  been  estab- 
lished to  meet  local  demands. 

In  the  system  there  were  some  404  miles  of  tracks  —  175  in 
the  city  of  Milwaukee,  20|  in  Racine,  60  miles  suburban  and 


238  PUBLIC  UTILITY  RATES 

16|  miles  inter  urban.  Under  the  old  plan,  5£  cash  fares  were 
collected  going  in,  into  and  across  each  zone.  On  some  subur- 
ban lines  7|^  commutation  ticket  books  were  sold.  A  few 
reduced-rate  round-trip  tickets  were  sold  to  some  interurban 
parts.  With  such  a  field  of  discrimination  over  which  the 
company  had  no  control,  it  was  inevitable  that  a  flood  of  com- 
plaints should  have  come  to  the  Railroad  Commission,  newly 
endowed  with  broader  powers.  By  mutual  agreement  the 
Commission  undertook  the  study  of  the  fare  question  in  Mil- 
waukee in  August,  1913,  and  in  January,  1914,  recommended  a 
new  zone  system.  There  were  provided  seven  zones,  outside 
the  central  city  district.  This  last  was  9  miles  long  and  6  miles 
wide  —  roughly  semi-circular  (for  Milwaukee  is  on  the  shore  of 
Lake  Michigan).  The  first-fare  district  extends  out  from  the 
center  of  gravity  of  traffic  from  2.7  to  5.8  miles  —  roughly  cor- 
responding to  the  then  city  boundaries.  Surrounding  this  are 
the  other  zones  each  about  1  mile  wide  but  shifted  reasonably 
to  important  traffic  points. 

Inside  the  central  district  a  single  5£  fare  is  charged  and  the 
usual  transfers  are  given.  For  a  ride  from  the  central  district 
into  or  across  each  zone  2^  is  collected  in  addition  to  the  5j£  fare. 
For  local  traffic  outside  the  central  district  2^  is  collected  for 
each  zone  traveled  in,  the  minimum  being  5jz£,  however,  for  a  single 
ride.  On  the  interurban  lines  beyond  the  suburban  zones  2^ 
per  mile  is  charged,  except  that  where  the  lines  pass  through 
important  towns  a  single  5^  fare  is  provided  within  that  munic- 
ipality's limits  in  place  of  the  2£  per  mile.  For  through  inter- 
urban service  the  central-district  part  of  the  fare  is  made  4j£. 
The  fare  between  any  two  outlying  towns  on  the  same  interur- 
ban line  is  equal  to  the  difference  between  the  through  rates  to 
these  places.  Children  under  three  years  of  age  are  carried 
free;  children  of  three  to  ten  years  at  half  fare. 

The  Commission  in  its  opinion  *  establishing  this  zone  system, 
noted  that  the  actual  costs  justified  rates  that  would  yield  about 
2.75^  per  passenger-mile  but  placed  the  fares  below  such  a 
basis  in  hope  of  encouraging  traffic  to  such  an  extent  that  an  ad- 
equate return  would  be  gained  over  all  expenses.  The  weighted 
average  over-all  earning  per  passenger-mile  for  the  city  and 

*  Re  Application  of  T.  M.  E.  R.  &  L.  Co.  for  Reasonable  Rates,  13  Wis.  R. 
R.  Comm.  Rep.  475. 


RATE  PROBLEMS  OF  STREET  RAILWAYS  239 

suburban  system  was  reported  *  to  be  1.18j£  before  the  change 
and  1.50f£  after. 

Milwaukee  Ticket  System.  —  The  collection  of  fares  on  the 
zone  system  described  has  not  been  insuperably  difficult,  al- 
though considerable  study  and  experimenting  has  been  needed. 
The  city  and  suburban  cars  are  of  prepayment  types  and  a 
light  portable  fare  box  is  used.  The  first  problem  was  the 
handling  of  small  zone  fares.  A  2^  zone  ticket  was  provided, 
marked  with  a  conspicuous  red  band  across  it,  and  sold  in  quan- 
tities. These  have  eliminated  trouble  in  collecting  pennies; 
the  conductors  carry  no  more  change  than  under  the  old  system. 

The  second  pressing  problem  was  to  show  the  zones  into 
which  each  passenger  had  paid  to  travel.  The  transfers  from 
central  district  to  suburban  lines  were  changed  so  that  the 
zone  to  which  fare  had  been  paid  could  be  punched.  On  the 
longest  line,  with  seven  2£  zones,  a  special  receipt  is  issued  be- 
cause of  lack  of  space  on  the  transfer  ticket.  As  outbound 
passengers  may  pay  the  city  fare  first  and  zone  fares  later,  the 
conductor  goes  through  the  car  at  the  first  zone,  carrying  the 
portable  farebox,  collecting  the  extra  fares  from  those  who  have 
not  paid  through  and  issuing  special  or  transfer  receipts.  When 
passengers  leave  they  surrender  the  receipts  —  and  if  the  amount 
paid  has  been  too  small  the  difference  is  then  collected.  In 
the  case  of  inbound  passengers  no  receipts  are  given  except  on 
the  longest  line;  the  passengers  deposit  through  fares  to  desti- 
nation. 

This  collection  system  is  reported  to  work  satisfactorily,  not 
causing  delays  or  congestion.  On  special  occasions  when  crowds 
are  presented  at  definite  points  for  loading,  extra  collectors  are 
put  on  for  as  long  periods  as  needed  and  the  cars  (prepayment 
type)  are  loaded  at  both  ends.  Rapid  loading  is  also  helped  by 
setting  up  portable  ticket  booths  at  suburban  resorts. 

*  For  detailed  figures  and  notes  on  the  system  here  described  see  "  A  Zone 
System  of  Fares  in  Practice,"  by  R.  B.  Stearns,  of  Milwaukee,  before  the 
American  Electric  Ry.  Assoc.,  October,  1914. 


CHAPTER  XIII 
PROBLEMS   OF  WATER  RATES 

Development  and  Magnitude  of  Industry.*  —  The  first  Ameri- 
can water- works  probably  was  that  in  Boston  in  1652  —  having 
a  12-foot  tank  near  Dock  Square  supplied  by  pipes  from  springs 
and  used  for  both  fire  protection  and  domestic  supply.  It  was 
not  until  1796,  when  the  population  was  21,000,  that  an  "  Aque- 
duct Corporation "  was  formed  to  bring  in  water  five  miles 
from  Jamaica  Pond.  This  private  system  was  relied  upon  until 
1848  when  the  first  steps  toward  the  present  system  were  taken. 

Bethlehem,  Penn.,  appears  next  (1754)  with  its  5-in.  lignum- 
vitse  pump,  log-pipe  line  and  wooden  reservoir.  In  1762  the 
town  installed  three  4  X  18-inch  iron  pumps  which  were  in 
service  for  70  odd  years. 

The  earliest  New  York  City  project  was  a  municipal  one  and 
started  in  1774  when  the  city  had  22,000  population;  there  was  to 
be  a  reservoir  and  well  east  of  Broadway,  1^  miles  above  the 
Battery.  The  Revolution  prevented  completion  of  the  system. 
In  1799  the  City,  then  having  a  population  of  60,000,  took  stock 
in  the  Manhattan  Corporation  which  built  a  tank  of  cast-iron 
plates  and  pumped  from  a  well  by  two  18-hp.  engines.  By 
1823  there  were  25  miles  of  pipes  and  2000  taps.  In  1830 
another  well  and  reservoir  were  built  further  uptown.  About 
this  time  the  city  built  its  own  works  for  fire  service,  which  rap- 
idly grew  and  developed  into  the  Croton  River  system  launched 
in  1835. 

In  1791  the  Morristown,  N.  J.,  Water  Co.  began  collecting 
and  distributing  water  from  the  local  hillsides.  Up  to  1798 
Philadelphia,  with  80,000  people,  had  drawn  its  water  from  wells; 
then  it  started  a  municipal  supply  project  which  was  com- 

*  See  a  series  of  papers  on  the  History  and  Statistics  of  American  Water- 
Works,  in  Engineering  News,  1881  to  1887.  These  studies  led  to  J.  J.  R. 
Croes'  "Statistical  Tables  of  American  Water-Works,"  and  M.  N.  Baker's 
"Manual  of  American  Water- Works, "  the  last  edition  of  which  appeared  in 
1897. 

240 


PROBLEMS  OF  WATER  RATES  241 

pleted  in  1800,  using  water  from  the  Schuylkill  River.  Here 
were  (for  America)  the  first  big  steam  water-works  pumps, 
the  first  cast-iron  water  mains,  the  first  successful  municipal 
water-works  development.  The  first  prominent  advance  in 
American  water-works  engineering  was  the  construction  of  the 
water-power  pumping  station  at  the  Schuylkill  River,  1818-1822. 
(A  log-crib  dam  gave  a  head  of  1  to  7  feet  for  three  breast  wheels 
driving  large  double-acting  horizontal  force  pumps;  turbines 
were  later  substituted.) 

In  1798  Worcester,  Mass.,  and  Portsmouth,  N.  H.,  started 
water- works;  in  Albany,  N.  Y.,  a  private  system  was  started 
in  1799.  The  first  works  of  magnitude  in  the  several  New 
England  states  appeared  as  follows:  New  Hampshire,  1798; 
Massachusetts,  1801;  Vermont,  1820;  Connecticut,  1832; 
Maine,  1851;  Rhode  Island,  1876.  The  development  in  im- 
portant and  typical  cities  is  shown  by  a  few  cases :  New  Orleans 
(founded  in  1718)  had  no  water-works  until  1836.  Buffalo 
(founded  in  1801)  had  none  until  1852;  Chicago  (laid  out  in 
1833)  had  water  service  in  1840;  Cleveland  (settled  in  1810) 
waited  until  1853;  San  Francisco  (settled  in  1776)  had  no  works 
before  1857. 

In  1800  there  were  16  water-works  in  this  country  and  in  ' 
1850   there   were   only  83.     In   1890  the  number   had   grown 
to  1878,  and  in  1897  there  were  3196.     At  the  present  time  there 
are  perhaps  6000,  complete  figures  not  having  been  collected  in 
recent  years.     In  Canada  there  were  528  works  in  1915. 

In  1800  only  one  of  the  16  existing  water-works  was  munic- 
ipally owned.  In  1835,  28%  had  come  under  the  local  govern- 
ments; in  1855  the  figure  had  risen  to  45%.  In  1875,  54%  were 
owned  by  the  public  but  the  addition  of  many  private  works  in 
the  next  few  years  brought  the  figure  down  to  43%  in  1890. 
However,  it  rose  to  54%  in  1897,  and  today  is  probably  above 
70%. 

In  1888  there  were  1666  water-works  serving  a  population  of 
14,858,000  and  having  an  investment  of  $432,226,000.  The 
revenue  was  $39,363,000.  No  accurate  figures  are  available  at 
the  present  moment  for  the  whole  industry  in  spite  of  the  great 
activity  of  the  United  States  Census  Bureau.* 

*  Attention  should  be  called  to  the  very  complete  data  for  1915  on  serv- 
ice equipment  and  rates  in  cities  of  over  30,000  population,  in  "General 


242  PUBLIC  UTILITY  RATES 

What  meager  evidence  there  is,  however,  points  to  a  total 
investment  of  $1,500,000,000  in  the  6000  plants  already  men- 
tioned as  existing,  to  a  population  served  of  about  40,000,000, 
and  to  an  annual  revenue  of  $115,000,000.  But  of  course  such 
estimates  can  only  be  "  educated  guesses."  It  is  greatly  to  be 
regretted  that  as  accurate  a  survey  of  the  development  of  this 
most  important  of  all  utilities  has  not  been  kept  up  as  has  been 
in  the  case  of  the  railroads,  electric  railways,  electricity-supply 
works,  and  telephone  companies.  This  will  be  changed  undoubt- 
edly, as  the  necessity  is  more  completely  recognized  of  placing 
water-works  under  the  same  regulation  as  other  utilities. 

Water-works  as  Utilities.  —  A  complete  works  for  the  dis- 
tribution of  a  supply  of  potable  water  to  inhabitants  of  a 
community  may  be,  as  to  its  general  place  among  public  utili- 
ties, either  a  service  or  a  product  type  —  as  earlier  defined. 
If  it  captures  a  surface  supply  of  water  and  impounds  it  for  con- 
veying by  gravity  in  aqueducts  and  mains  to  the  consumers, 
obviously  it  is  of  the  product  type  for  the  magnitude  of  its 
works  depends  on  the  total  quantity  supplied  during  some  oper- 
ating cycle  more  than  on  the  peaks  of  demand,  maximum  rates 
of  draft,  etc.*  If,  however,  it  pumps  from  an  underground  or 
low-level  body  into  the  supply  mains  and  the  supply  and  pres- 
sure are  pump  maintained,  then  much  investment  in  plant  is 
fixed  by  the  peak  service  and  the  water-works  becomes  a  service- 
type  utility  to  which  the  principles  of  demand,  quantity  and 
customer  costs  may  apply  to  greater  or  less  extent.  These 
principles  would  apply  here  without  reservation  if  it  were  not 
for  the  superimposition  of  fire-protection;  the  physical  plant 
developed  for  the  combined  services  is  not  what  it  would  be  for 
either  alone.  Notwithstanding  the  complication  of  fire  service, 

Statistics  of  Cities,  1915"  issued  in  1916  by  the  U.  S.  Bureau.  Information 
on  the  personnel,  equipment,  treatment,  service  and  rates  of  a  large  per- 
centage of  American  water-works  is  to  be  found  in  the  1915  "Waterworks 
Directory"  of  the  McGraw  Publishing  Co.,  New  York  City. 

*  Speaking  of  the  ordinary  consumer's  requirements  only,  and  not  in- 
cluding the  effect  of  municipal  fire  service  which  may  be  regarded  as  super- 
imposed on  the  domestic-supply  service  (or  trice  versa).  For  the  first  approach 
to  a  study  of  water-works  rate-making,  the  domestic-supply  and  fire-pro- 
tection works  may  be  considered  as  superimposed  departments,  the  functions 
and  technology  of  which  may  be  discussed  separately,  leaving  the  effect  of 
the  superimposition  on  rate-making  to  appear  later. 


PROBLEMS  OF  WATER  RATES  243 

the  demand,  quantity  and  customer  costs  may  be  assessed  on  a 
consumer  fairly  in  accordance  with  his  maximum  demand,  diver- 
sity factor,  quantity  furnished  and  the  number  of  customers 
supplied. 

Regulation  of  Water  Utilities.  —  The  regulation  of  rates,  serv- 
ice, capitalization  and  development  of  water-supply  utilities 
and  projects  has  been  caught  between  various  regulating  bodies 
so  that  there  are  in  some  cases  uncertainty  and  inconvenience 
for  the  utility,  and,  in  other  cases,  general  lack  of  that  control 
which  the  public  may  fairly  and  reasonably  exercise.  There 
is  as  yet  only  a  tendency  to  escape  this  condition  by  a  more 
logical  development  of  state  supervision,  'though  it  is  plainly 
evident  that  such  is  the  best  course. 

Every  state  has  a  department  of  health  of  greater  or  less 
effectiveness,  depending  on  its  authority,  personnel,  and  ap- 
propriations; and  to  these  boards  sanitary  control  over  the 
water-works  —  private  company  or  municipal  department  - 
is  commonly  given,  so  widespread  is  the  knowledge  that  the 
lives  of  the  people  at  large  depend  on  the  quality  of  the  water. 
The  best,  and  a  considerable  number,  of  these  boards  have  well- 
equipped  and  well-manned  laboratory  and  field-engineering  de- 
partments so  that  their  control  of  water-supplies,  along  with  the 
parallel  matters  of  sewage  disposal  and  disease  control,  is  highly 
intelligent,  efficient,  effective  and  beneficial.  The  approach  to 
this  situation  has  been  gradual  and  fairly  logical. 

Alongside  the  boards  of  health  have  sprung  up  the  state 
public-utility  commissions  exercising  more  or  less  complete  super- 
vision over  character  of  service  and  size  of  rates  for  various  pub- 
lic services.  Legislatures .  have  apparently  hesitated  to  give 
utility  commissions  the  same  powers  over  water  utilities  that 
they  exercise  over  railroad,  gas,  electric  and  telephone  com- 
panies. They  have  evidently  realized  the  health  menace  that 
would  result  by  transferring  sanitary  control  from  an  experi- 
enced and  equipped  department  to  a  green  organization;  they 
have  seen  as  well  the  intimate  relation  between  sanitary  control 
of  water-works  and  general  public-health  work.  Legislatures 
have  hesitated  to  put  the  financial  operations  under  utility 
commissions,  perhaps  because  of  the  great  preponderance  of 
municipally  owned  works  —  2  to  1.  In  few  states  has  as  com- 
plete oversight  over  municipal  as  over  private  utilities  been 


244  PUBLIC  UTILITY  RATES 

secured.  In  only  one  known  case  —  Massachusetts,  for  private 
companies,  only  —  was  rate  control  placed  in  the  health 
board's  hands,  presumably  because  of  the  apparent  remoteness 
of  rates  from  matters  of  public  health.  But  nevertheless  the 
control  of  water-works  service,  as  to  pressure,  fire  protection, 
adequate  and  safe  structures  and  the  scrutiny  of  rates,  has  con- 
tinued to  grow  steadily  as  an  utility-commission  function. 

There  is  no  reason  why  this  bifurcated  supervision  should  not 
continue  to  give  good  results,  though  such  division  of  govern- 
mental function  in  general  is  hardly  to  be  encouraged.  If 
there  should  arise  any  tendency  to  friction  or  deadlock,  it  can 
be  eliminated,  without  the  sacrifice  of  prestige  on  either  side, 
by  following  the  course  taken  in  1915  by  the  Wisconsin  Rail- 
road and  Industrial  Commissions  in  regard  to  safety  of  electric 
circuits;  they  sat  jointly  and  produced  a  single  code  of  rules 
under  which  either  or  both  may  act  with  full  knowledge  that  no 
one  will  escape  the  provisions  of  the  law  by  litigation  over  re- 
spective jurisdictions. 

Between  the  sanitary  and  financial  supervision  exercised  by 
health  and  utility  commissions  there  has  sprung  up  in  a  few 
states  the  control  of  water-shed  acquisition  and  development 
by  a  third  body  commonly  styled  a  water-supply  commission. 
Apportionment  of  water  between  rival  claimants  also  has  been 
settled  by  such  boards.  This  may  be  regarded  as  a  non-per- 
manent development  not  apt  to  extend  greatly  and  then  only  for 
special  conditions.  The  work  of  a  water-supply  board  is  in 
some  ways  closely  analogous  to  the  valuation  and  rate-making 
activities  of  an  utility  commission,  and  in  any  event  the  engi- 
neering and  legal  departments  of  the  latter  are  in  an  excellent 
position  to  handle  all  the  matters  which  the  water-supply  com- 
mission could  take  up. 

Better  regulation  of  water  utilities  is  one  of  the  greatest  needs 
of  present-day  public-utility  service.  By  leaving  water  com- 
panies and  municipal  departments  —  the  latter  particularly  - 
too  much  to  themselves,  there  have  been  encouraged  wide- 
spread continuance  of  unfair  rates,  unintelligent  accounting,  and 
inefficient  and  inadequate  service.  With  all  these  there  is  a  sur- 
prising narrow-mindedness  of  managing  officials  as  to  the  place 
of  a  water-works  among  the  other  utilities  and  as  to  the  occu- 
pancy of  streets,  the  assumption  of  fire-protection  duties,  etc. 


PROBLEMS  OF  WATER  RATES  245 

The  ease  with  which  a  fair  supply  is  distributed  through  a  com- 
munity, the  inherently  simple  and  almost  fool-proof  nature  of 
many  moderate-pressure  gravity-supply  works,  and  the  wide 
discrepancy  prevailing  between  the  cost  and  the  value  of  water 
service,  have  conspired  to  keep  knowledge  of  this  situation  from 
spreading  widely.  Had  the  shortcomings  of  municipal  water 
departments  been  fully  investigated  the  opponents  of  municipal 
ownership  of  public  utilities  would  not  have  lacked  campaign 
ammunition;  and  they  would  not  have  sidestepped  the  issue  in 
the  water-supply  field  or  excused  municipal  ownership  here  on 
the  ground  of  close  public  interest  in  matters  like  public  health 
and  fire  protection. 

Varied  Requirements  for  Good  Water.  —  There  are  a  mul- 
titude of  services  for  which  the  supply  of  a  local  water-works  is 
drawn  on  that  most  people  do  not  realize.  The  ordinary  do- 
mestic consumption  and  the  fire-fighting  supply  are  obvious  but 
few  of  the  others  are.  The  requirements  defining  a  good  water 
differ  widely  and  few  indeed  are  the  supplies  which  are  ideal 
for  all  the  purposes  to  which  they  are  put.  Water  is  needed  in 
large  quantities,  particularly  for  feeding  steam  boilers,  for  paper 
and  pulp  mills,  textile-finishing  works,  food-product  factories, 
for  soap,  glue  and  chemical  works,  etc. 

Many  of  the  waters  supplied,  by  companies  and  municipal 
departments  alike,  contain  considerable  dissolved  lime,  mag- 
nesia and  iron,  being  then  called  "  hard."  Such  burdens  do  not 
affect  the  healthfulness  of  a  supply,  though  for  steam-power 
plants  and  some  manufacturing  processes  its  use  is  very  un- 
desirable. There  is  an  appreciable  money  loss  even  for  ordi- 
nary domestic  consumers  on  account  of  the  greater  amount  of 
soap  used  in  washing.  Hard  waters  interfere  with  the  treatment 
of  fabrics  and  waste  the  chemicals  used  in  breaking  up  wood 
fiber  and  in  finishing  paper.  In  steam  boilers  the  hard  waters 
let  down  a  precipitate  which  incrusts  the  heat-transfer  surfaces 
and  leads  to  pitting  and  overheating,  besides  giving  a  direct 
loss  of  efficiency  of  evaporation.  Iron  is  a  particularly  un- 
desirable content  for  manufacturing  plants  on  account  of  the 
discolorations  produced  on  papers,  textiles,  foods,  etc.  Inert 
suspended  matter  is  objectionable  for  similar  reasons. 

While  stain,  turbidity  and  taste  are  not  entirely  pleasant 
in  a  potable  water  they  are  seldom  really  unhealthful.  It  is 


246  PUBLIC  UTILITY  RATES 

bacterial  content  which  at  present  is  the  common  criterion  of 
quality  in  a  domestic  supply.  Stimulated  by  state  and  local 
boards  of  health,  great  attention  is  paid  to  removing  bacteria 
from  municipal  supplies.  In  a  few  cases  hard  waters  are  sof- 
tened at  the  water-works  and  in  many  cases  by  manufacturing 
customers.  Where  iron  is  carried  there  ultimately  develops  a 
demand  for  its  removal. 

Water-works  Technology.  —  The  water  company  or  munici- 
pality which  has  a  "  gravity  "  system  usually  owns  or  controls 
an  elevated  drainage  area  on  which  there  is  preferably  little  or 
no  population.  It  collects  part  of  the  run-off  in  impounding 
reservoirs,  holding  the  needed  supply,  and  lets  the  rest  waste  over 
the  spillways.  The  all-important  question  about  such  a  supply 
is  the  matter  of  sewage  pollution.  Prevention  of  pollution  is 
sought  by  sanitary  control  of  the  drainage  area,  though  this 
does  not  necessarily  require  depopulation  —  control  of  wastes 
may  be  sufficient,  but  purification  may  be  needed. 

For  municipalities  on  low  plains  or  above  possible  reservoirs, 
the  use  of  pumps  ordinarily  becomes  imperative,  to  lift  water 
from  low-lying  surface  bodies  or  from  wells  tapping  water-bear- 
ing strata,  and  to  maintain  pressure  on  the  distributing  pipes  - 
often  with  an  elevated  tank  or  tall  standpipe  to  equalize  small 
flow  and  pressure  fluctuations  or  to  carry  through  the  night  when 
little  water  is  required. 

The  supply  mains  from  reservoirs,  or  the  force  mains  from 
pumps  to  distributing  lines,  may  be  of  steel  plate,  cast  iron, 
reinforced  concrete  or  wood  staves,  depending  on  the  pres- 
sures, local  conditions  and  preferences,  etc.  The  distributing 
mains  in  a  large  majority  of  installations  are  of  cast-iron  pipe, 
though  there  is  some  welded  steel  pipe  and  a  little  cement-lined 
iron-  and  steel-plate  pipe  still  used.  The  latter  was  popular 
up  to  about  1885.  The  service  lines  branching  off  to  the  con- 
sumers' premises  are  commonly  of  small  galvanized  or  lead-lined 
iron  and  steel  pipes.  Many  are  of  lead. 

So  far  as  public  appreciation  has  shown  itself,  clear  and  whole- 
some ground  water  rising  from  considerable  depths  is  the  pre- 
ferred supply  for  domestic  consumption.  The  supply  next  in 
favor  seems  to  be  a  surface  water  from  distant  unpopulated  or 
very  sparsely  settled  mountain  drainage  areas.  Ground  waters 
which  have  to  be  softened  or  otherwise  improved,  or  surface 


PROBLEMS  OF  WATER  RATES  247 

waters  which  have  to  be  purified  seem  to  occupy  the  rear  place 
in  popularity. 

The  use  of  water  unpolluted  as  originally  captured  is  desir- 
able and  it  inspires  public  confidence.  But  the  use  of  a  supply 
that  is  contaminated  as  first  taken,  is  safe  so  long  as  the  man- 
agement of  the  water-works  is  in  the  hands  of  competent  tech- 
nical men,  for  the  art  and  science  of  water  purification  have 
been  carried  to  a  certainty  of  results  that  may  well  beget  pub- 
lic confidence.  Whereas  with  a  good  water  low  rates  and 
adequate  service  depend  on  keeping  the  evils  of  politics  out  of 
the  water  department,  on  the  other  hand  if  the  source  be  pol- 
luted, the  very  lives  of  the  people  may  depend  on  freedom  from 
political  dictation. 

The  incrusting  substances  precipitated  in  a  boiler  by  the 
effect  of  heat  are  the  iron,  calcium,  aluminum  and  silicon  ox- 
ides, and  the  calcium  and  magnesium  carbonates  and  sulphates. 
Acids  that  pit  boiler  shells  may  be  released  by  the  depositions 
of  these  compounds,  or  they  may  come  from  organic  matter. 
Foaming  may  be  due  to  concentration  of  sodium  and  potassium 
salts  which  remain  soluble.  Blowing  off  some  of  the  boiler 
water  and  replacing  with  a  fresh  supply  is  the  common  remedy 
for  foaming;  loose  precipitates  are  also  swept  out  in  the  blow- 
ing down.  The  softening  and  removal  of  scale-forming  salts 
may  be  done  cold  by  a  chemical  precipitation  (commonly  with 
lime  and  soda  ash)  and  settlement  or  screening,  or  it  may  be 
done  by  heating,  dosing  and  rapidly  filtering.  Also  the  use  of 
artificial  and  natural  zeolites  has  been  seen;  these  are  peculiar 
sodium-aluminum  silicates  which  possess  the  property  of  ex- 
changing their  sodium  for  calcium  and  magnesium  as  hard 
water  flows  over  them.  The  material  is  crushed  and  placed  in 
filter  tanks,  and  after  the  exchange  of  sodium  is  completed  a 
solution  of  common  salt  is  allowed  to  flow  through  slowly  when 
the  reverse  restoring  exchange  is  effected.  The  calcium  salts 
are  then  washed  out  of  the  zeolite  bed  by  a  reverse  current  of 
water. 

The  removal  of  both  suspended  matter  and  bacteria  is  com- 
monly secured  by  filtration.  This  may  be  by  the  "  slow  "  proc- 
ess of  percolating  (at  a  rate  of  2,000,000  to  4,000,000  gallons 
per  acre  per  day)  through  3  or  4  feet  of  sand  overlying  coarse 
gravel  and  drain  tiles;  or  it  may  be  by  the  more  rapid  "  mechani- 


248  PUBLIC  UTILITY  RATES 

cal"  filtration  where  a  coagulant  like  alum  (aluminum  sul- 
phate) is  added,  to  form  a  flocculent  precipitate  and  enmesh 
the  coloring  particles  and  the  bacteria,  3  or  4  hours  before  forcing 
through  small  beds  of  graded  sand  on  strainers  —  at  rates  of 
100,000,000  to  120,000,000  gallons  per  acre  per  day.  In  the 
slow-sand  filters  when  the  top  is  fouled  the  beds  are  drained  and 
about  a  half-inch  is  scraped  off  and  washed  for  replacing  when 
the  beds  have  been  scraped  down  20  to  25  times.  In  a  few 
places  a  little  coagulant  is  used  with  slow  sand  filtration  to  bring 
down  temporary  burdens  of  clay.  When  the  rapid  filter  is 
once  clogged,  the  water  flow  is  reversed  and  the  sand  agitated 
by  mechanical  raking  or  by  blowing  in  air.  Purification  plants 
add  greatly  to  the  investment  in  and  operating  costs  of  a  water- 
works; they  demand  skilled  attention  and  unharassed  manage- 
ment. 

When  water  has  to  be  pumped  continually  the  lowest-duty 
unit  commonly  permitted  is  the  compound  non-condensing  du- 
plex pump.  It  is  satisfactory  for  small  works  because  of  its 
simplicity  of  operation  and  ease  of  maintenance,  but  it  is  rela- 
tively low  in  economy  (50-60  million  foot-pounds  per  1000  pounds 
of  steam)  compared  with  more  expensive  equipment.  The  first 
step  above  is  the  use  of  a  condensing  type  of  compound  duplex 
pump.  This  introduces  only  the  complication  of  a  condenser  and 
raises  the  duty  to  70-80  million  foot-pounds  per  1000  pounds 
steam,  increasing  the  station  economies  somewhat  more  than  in- 
dicated by  engine  figures  alone.  Where  constant  use  of  good-sized 
pumps  is  needed,  it  pays  to  go  to  double-  or  triple-expansion 
crank-and-flywheel  units  for  here  the  heavier  costs  are  spread 
over  such  large  quantities  furnished  that  the  best  of  mechanics, 
attendants  and  works  engineers  can  be  afforded.  These  units 
have  got  up  to  duties  of  over  200  million  foot-pounds  per  1000 
pounds  steam  (though  the  use  of  superheated  steam  makes  the 
apparent  gain  greater  than  the  actual,  as  disclosed  by  the  more 
scientific  comparison  of  foot-pounds  per  million  heat  unite  in  the 
steam). 

Electric-motor  or  steam-turbine  driven  centrifugal  pumps  are 
becoming  more  and  more  formidable  competitors  of  all  the 
older  water-works  engines.  They  can  be  had  already  in  de- 
signs showing  80%  of  the  duty  records  of  the  best  reciprocating 
machines  and  their  first  cost  is  sufficiently  less  to  make  the 


PROBLEMS  OF  WATER  RATES  249 

total  cost  of  pumping  as  low  or  lower,  in  the  majority  of 
cases. 

An  important  part  of  the  water-works  equipment  from  the 
standpoint  of  rates  is  the  consumer's  meter.  The  types  in 
most  extended  use  are  the  positive-action  and  inferential.  The 
first  named  are  largely  miniature  rotary-piston  engines  having 
either  a  spur  pinion  rolling  around  on  a  larger  internal  annular 
gear  or  else  a  disk  wabbling  around  between  two  conical  frus- 
tums placed  peak  to  peak  in  a  spherical  chamber.  In  lesser 
use  are  the  inferential  meters  which  measure  the  flow  by  the 
impact  of  the  flowing  supply  on  buckets  or  vanes  of  a  wheel. 
In  all  types  the  moving  parts  actuate  a  counting  gear  train,  the 
pointer  or  numbered  disk  of  which  shows  on  an  indicator-dial. 

Water  Consumption.  —  A  community's  draft  has  marked 
peaks  which  may  become  of  importance  in  finding  the  capacity 
required  for  a  system  having  no  fire-protection  provisions.  There 
has  not  been  much  done  in  finding  this  draft  of  water  from  hour 
to  hour.  It  can  be  approached  however  from  the  studies  made 
for  sewerage.*  The  domestic  service  rises  from  about  75% 
of  the  average  during  the  early  morning  hours  to  a  sharp  peak 
from  5-9  (125%  of  average),  a  drop  to  110%  at  10  A.M.,  a 
peak  of  120%  at  12-1  P.M.,  a  drop  to  100%  at  4.  P.M.,  another 
peak  of  115%  at  5  o'clock  and  a  slow  return  through  the  night. 
A  city  having  a  number  of  industrial  works  drawing  water, 
besides  the  residence  drafts  from  hour  to  hour  as  shown,  would 
be  expected  to  have  the  peak  rise  to  some  140%  of  average, 
sustain  itself  for  2  to  4  hours  and  steadily  drop  down  to  a  mini- 
mum of  50-60%  at  1-4  A.M.  Between  such  cities  are  those 
which  rise  from  70-80%  of  average  between  1  and  4  A.M.,  and 
sustain  a  peak  of  120-130%  of  the  average  from  7  A.M.  to  3 
P.M.  and  then  steadily  drop  off.  On  Sundays  both  quantity 
and  peak  drop  off.  On  Mondays  (washday?)  both  total  amount 
and  height  of  peak  increase. 

The  figures  quoted  are  deduced  from  the  flow  of  sewage  at 
outlets,  the  corresponding  flows  of  sewage  coming  about  two 
hours  later  than  the  stated  water  drafts.  In  studying  peak 
loads  of  water  draft,  via  the  sewage,  it  must  be  remembered 
that  in  specific  locations  and  instances  there  may  be  an  inleak- 
age  of  ground  water  and  discharge  of  industrial-plant  water 

*  Metcalf  and  Eddy,  "American  Sewerage  Practice,"  1914,  pp.  187-206. 


250  PUBLIC  UTILITY   RATES 

originally  drawn  from  private  wells  instead  of  the  water-works 
system.  The  sewage  flow  of  Cincinnati,  however,  for  instance, 
shows  in  a  residential  district  (Ross  Run  Sewer)  a  rise  from  5 
to  9  A.M.  of  50%  to  179%  of  the  average,  slowly  and  steadily 
decreasing  for  the  rest  of  the  day  and  night,  showing  that  the 
noon  and  evening  peaks  may  sometimes  be  suppressed.  The 
corresponding  heavy  water  draft  comes  probably  from  3  to 
7  A.M. 

There  would  not  be  expected  to  be  any  great  difference  in 
peaks  or  totals  for  summer  and  winter  —  such  as  exist  in  electric 
and  gas  service  unless  the  place  has  a  summer  or  winter  increase 
of  population  like  some  resorts. 

Fire  Service  or  Domestic  Supply  First?  —  The  discussions  of 
water-works  officials  show  that  in  some  places  fire  protection  is 
regarded  as  the  primary  service  for  which  their  works  were 
instituted;  others  regard  this  as  incidental,  even  though  of  ex- 
treme importance,  to  the  domestic  supply.  Which  view  prevails 
or  should  prevail  in  any  given  case  may  decidedly  affect  the 
rates  for  fire-protection  service.  The  extreme  comes  when  the 
charges  are  based  on  what  a  plant  solely  for  the  given  fire  pro- 
tection would  cost  and  this  may  approach  the  cost  of  the  given 
system  —  less  purification  works,  service  pipes,  etc.,  and  with 
less  expensive  lower-efficiency  pumping  equipment  where  pumps 
are  used.  At  the  other  extreme,  where  the  fire  service  is  con- 
sidered as  grafted  upon  the  domestic  supply,  the  minimum 
burden  may  be  considered  as  the  enlargement  of  the  physical 
works  demanded  by  the  fire  protection  over  that  sufficient  for 
adequate  domestic  and  manufacturing  supply.  If  such  a  view 
prevailed,  as  it  will  in  perhaps  the  majority  of  instances,  it  might 
be  necessary  to  burden  the  fire  service  with  the  larger  purifi- 
cation works  needed  to  meet  the  possible  drafts  of  water  in  case 
of  a  conflagration,  the  larger  pumping  units,  mains,  etc.,  as 
discussed  in  detail  later. 

A  good  fire  stream  requires  about  250  gallons  per  minute  at 
a  pressure  of  50  to  60  pounds  per  square  inch  at  the  hydrant, 
though  both  quantity  and  pressure  may  reasonably  drop  to 
150-200  gallons  and  40  pounds  in  purely  residential  areas.  The 
number  of  streams  possible  to  be  concentrated  on  any  point 
should  depend  on  the  character  of  the  locality  —  as  to  popula- 
tion, density  and  height  of  buildings,  width  of  streets  and  factors 


PROBLEMS  OF  WATER  RATES  251 

fixing  the  dangers  of  conflagration.  The  number  of  streams 
which  it  is  conceded  *  need  to  be  available  at  once  runs  from  3 
in  a  1000-population  town  to  12  for  10,000  people,  15  for  20,000 
people  and  in  proportion  up  to  30  for  100,000  population. 

In  the  congested  districts  two-thirds  of  these  streams  should 
be  concentrated  on  any  square  or  on  each  important  hazard 
with  a  minimum  of  10  streams;  the  hose  lengths  should  not  be 
over  250  feet.  Six-inch  pipe  mains  are  commonly  held  to  be  the 
safe  minimum  for  good  fire  pressure  whereas  4-inch  often  would 
do  for  ordinary  supplies. 

Charges  for  Fire  Protection.  —  It  is  only  in  very  recent  years 
that  intelligent  study  has  been  made  of  the  proper  charges 
for  the  fire-protection  service  afforded  a  community  by  its  water- 
works —  for  what  commonly  is  called  "  hydrant  rental."  It  is 
now  seen  that  in  a  large  number  of  cases  an  appreciable  injustice 
has  been  done  on  the  one  hand  to  the  water  company  or  munici- 
pal department,  or  on  the  other  hand  to  the  customers  as  con- 
trasted with  the  taxpayers.  Where  a  community  has  long  paid, 
say,  $10  a  year  per  hydrant,  it  is  loath  to  pay  $50  when  it  real- 
izes that  comparatively  little  water  is  drawn  and  few  hydrants 
are  opened  at  all.  Some  large  measure  of  responsibility  must 
be  assumed  by  the  utility  managers  for  the  widespread  failure 
of  the  public  to  realize  that  there  is  a  considerable  investment 
in  hydrants  and  hydrant  connections,  and  in  larger  mains,  reser- 
voirs and  pumps,  which  would  not  have  been  made  if  fire  protec- 
tion had  not  been  considered. 

Reduced  to  its  fundamental  terms  the  way  is  simple  to  find 
out  what  charges  ought  to  be  made  for  fire-protection  service, 
or  "  hydrant  rental "  as  it  is  inadequately  termed.  It  is  as- 
sumed of  course  that  the  company  is  to  secure  a  return  covering 
the  actual  cost  of  rendering  the  fire  service  plus  a  reasonable 
return  on  the  investment  required  for  this  alone.  The  question 
of  super-profits  to  induce  maximum  economy  and  superior 
service  usually  disappears  as  most  water-utility  managers  real- 
ize that  fire  protection  acts,  to  insure  the  uninterrupted  con- 
tinuance of  each  customer's  service  and  payments  and  is  to  be 
encouraged  in  every  way.  The  community  should  pay  a  reason- 

*  J.  R.  Freeman,  "Arrangement  of  Hydrants  and  Pipes  For  Protection  of 
a  City  Against  Fire,"  Journal  of  the  New  England  Water-Works  Association, 
Vol.  7. 


252  PUBLIC  UTILITY  RATES 

able  return  (including  retirance)  on  the  difference  in  the  value  of 
the  plant  as  it  exists  and  as  it  would  be  if  no  fire-protection  serv- 
ice were  given;  the  community  should  also  pay  the  actual  cost 
of  maintaining  the  hydrants,  hydrant  connections,  extra  pumps 
and  reservoirs  and  in  most  cases  the  excess  cost  of  maintaining 
the  mains  and  supply  lines  over  what  would  be  required  for  the 
domestic  system  alone. 

The  actual  determination  of  the  extra  investment  in  the 
several  parts  of  any  specific  water-works  is  properly  the  work 
of  an  engineer  and  is  to  a  certain  extent  a  matter  of  judgment 
as  well  as  of  computation.  The  allocation  of  maintenance 
costs  is  a  matter  of  proper  accounting  and  scrutiny  of  records. 
Each  case  should  be  studied  by  itself,  but  there  are  various 
comparisons  which  may  be  made  to  afford  a  general  check  on  the 
reasonableness  of  the  results  obtained. 

The  Delusions  of  "  Hydrant  Rentals."  —  Not  only  is  the  use 
of  the  term  "  hydrant  rentals "  unfortunate  in  its  inadequate 
public  impression  of  what  is  back  of  water-works  fire  protection, 
but  also  the  term  has  no  logical  or  consistent  relation  in  differ- 
ent localities.  That  is  to  say,  the  cost  of  fire  protection  divided 
by  the  number  of  hydrants  is  not  necessarily  the  same  in  two 
places  of  the  same  size.  It  depends  on  the  character  of  the 
city  (residential,  industrial,  etc.),  the  configuration  of  the  town- 
site  (long  and  narrow,  circular,  square,  etc.),  the  extent  of  con- 
gestion in  business  and  population,  the  peculiarities  of  business 
and  of  building  construction,  the  history  of  the  water-works, 
and  other  factors.  The  costs  of  fire  protection,  figured  on  the 
hydrant  basis  are  of  service  for  comparison  only  when  the  effect 
of  such  matters  is  taken  into  account. 

The  use  of  hydrant-rental  figures,  in  spite  of  their  uncertain 
basis,  is  largely  seen  in  statements  of  fire-protection  charges. 
The  figures  range  all  the  way  from  $10  per  year  to  $100  with 
the  majority  running  between  $30  and  $60  (see  accompanying 
tabulation  of  rates  from  a  study  of  315  towns  and  cities,  printed 
in  the  Journal  of  The  American  Water- Works  Association,  June, 
1914).  The  results  of  rate  investigations  in  a  few  cities  give 
rise  to  the  expectation  that  in  few  cases  will  the  actual  annual 
cost  per  hydrant  fall  below  $40.  This  is  confirmed  by  a  study  of 
the  number  of  hydrants  in  American  cities,  as  reported  by  the 
U.  S.  Bureau  of  the  Census,  in  connection  with  the  experience 


PROBLEMS  OF  WATER  RATES 


253 


of  per  capita  cost  of  fire  protection  in  cities  of  various  classes  * 
as  follows: 


Population  Group 

Aggregate 
Population 

Number  of 
Hydrants 

Cost  of 
Fire  Protection 
per  Capita 

Annual  Cost 
per  Hydrant 

Above  300,000 

12,375,463 

133,068 

$0.60 

$56 

100,000-300,000 
50,000-100,000 

3,285,351 
2,364,110 

55,053 
40,865 

0.75 
1.00 

42 
58 

30,000-  50.000 

1,543,286 

34,700 

1.25 

55 

Lump-sum  Charge  for  Fire  Protection.  —  Since  the  proper 
amount  to  be  received  by  a  water  company  or  department  from 
any  community  depends  so  much  on  local  conditions  an  equi- 
table lump-sum  charge  may  be  fixed  in  each  case  which  was 
reasonable  on  a  given  date.  To  this  from  year  to  year  should 
equitably  be  added  the  fixed  charges  and  operating  expenses  of 
new  hydrants,  new  hydrant  connections  and  excess  size  of  new 
mains.  In  places  where  the  annual  determination  of  these  ad- 
ditions by  engineering  methods  demands  unwarranted  expense, 
an  approximate  substitute  should  be  figured  out  beforehand,  based 
on  number  of  new  hydrants,  miles  of  new  line  or  even  increase 
in  population. 

Effect  of  Fire  Service  on  Water-works  Costs.  —  It  has  been 
one  of  the  classic  statements  of  water-works  men  that  half  of 
the  cost  of  the  entire  equipment  was  made  necessary  for  fire 
protection.  Experience  of  many  engineers  shows  that  this  is 
more  or  less  true  in  very  many  cases,  and  is  probably  based  on 
conditions  which  prevail  in  cities  of  25,000  to  50,000  population. 
But  that  figure  is  not  necessarily  true  in  any  one  city,  so  in- 
fluential are  the  special  local  conditions.  It  has  been  stated 
by  well-known  experts  f  that  the  cost  of  that  part  of  the  physi- 
cal water-works  plant  required  for  fire  protection  over  domestic 
and  commercial  service  probably  ranges  from  10  to  20%  in  the 
largest  cities,  and  20  to  30%  in  cities  of  about  100,000  population, 
to  60  or  80%  for  places  of  5000  or  less. 

Quantity  of  Water  to  be  Provided  for  Fire  Service.  —  There 
have  been  several  investigations  of  the  amount  of  water  which 

*  "Reasonable  Return  For  Public  Fire  Hydrant  Service,"  by  Metcalf, 
Kuichling  and  Hawley,  Proceedings  of  the  American  Water- Works  Associ- 
ation, 1911. 

t  Metcalf,  Kuichling  and  Hawley;  1911  Proceedings,  American  Water- 
Works  Association,  p.  66. 


254 


PUBLIC  UTILITY  RATES 


should  be  provided  for  in  the  design  of  mains  and  supply  lines 
to  insure  adequate  fire  protection.  One  of  the  earliest  is  that 
of  J.  R.  Freeman;*  this  was  followed  by  one  by  Emil  Kuich- 
ling,f  one  by  Allen  Hazen  J  and  one  by  Metcalf,  Kuichling  and 
Hawley,  §  making  use  of  reports  of  the  National  Board  of  Fire 
Underwriters  for  data  of  requirements  in  143  cities.  The  re- 

60 


60  100  150  _  200  £50 

X=  Population    in    Thousands 

WATER  REQUIREMENTS  AND  FIRE-PROTECTION  COSTS 

suits  obtained  by  all  these  men  are  in  fair  agreement  and  are 
sufficiently  represented  by  the  simple  Kuichling  curve  given  in 
the  accompanying  diagram  (which  curve  has  the  equation 
Y  =  ~Vx) .  The  maximum  flow  due  to  domestic,  industrial  and 
public  consumption,  without  fire  protection,  is  also  plotted  for 
two  conditions  —  one  on  the  assumption  that  the  fluctuations 
of  domestic,  industrial  and  public  services  require  a  carrying 
capacity  of  double  the  average  daily  rate,  and  the  other  on  the 
assumption  that  a  capacity  of  1?  times  the  average  flow  is 
required.  These  curves  have  the  equations  respectively  of 
Y  =  0.064  X$  and  Y  =  0.048  X*.  In  both  cases  the  consumption 

*  Journal,  New  England  Water-Works  Assoc.,  Vol.  7,  p.  49  (1892). 
t  Transactions,  American  Society  of  Civil  Engineers,  Vol.  38,  p.  15. 
t  "American  Civil  Engineers  Poqketbook,"  1911,  p.  947. 
§  "Determination  of  Reasonable  Return  For  Public  Fire  Hydrant  Serv- 
ice," Proceedings  American  Water- Works  Assoc.,  1911,  p.  67. 


PROBLEMS  OF  WATER  RATES  255 

is  computed  on  the  basis  of  50  gallons  per  capita  per  day  for  a 
place  of  100,000  population,  80  gallons  for  a  place  of  100,000  and 
100  gallons  for  one  of  300,000. 

The  maximum  draft  then  to  be  provided  for  is  the  sum  of  the 
domestic  and  fire-protection  demands.  The  fact  should  be  taken 
into  account  that  the  enlargement  of  plant  for  fire  service  helps 
the  domestic  service  requirements  except  in  brief  times  of 
emergency,  when  diminished  domestic  service  becomes  of  second- 
ary importance.  This  is  done  by  adding  to  the  fire-protection 
requirements  the  domestic  needs  based  on  a  maximum  of  1| 
times  the  average  instead  of  the  larger  figures  which  would 
otherwise  be  expected.  The  curve  of  total  maximum,  quantity 
to  be  provided  is  plotted  on  the  same  diagram  (and  is  repre- 
sented by  the  expression  VX  +  0.048  X$).  The  ratio  of  the 
difference  in  capacity  between  the  systems  with  and  without 
fire  protection  to  the  capacity  of  the  system  with  fire  protection 
is  then 

VX  +  0.48  X*  -  0.064  X*  =  VX  -  0.016  X§ 
VX  +  0.48  X%  ~  VX  +  0.048  X* ' 

In  the  case  of  mains  this  ranges  from  50-80%  for  small  cities 
to  10-20%  for  the  largest.  The  same  studies  obviously  are  to 
be  applied  to  the  pumping  and  various  reservoir  services. 

These  engineers  after  reviewing  their  experience  and  that  of 
others  as  to  division  of  cost  of  water-works  plants  among 
supply,  pumping,  reservoir,  distribution,  filter,  real  estate  and 
rights,  organization  and  interest  during  construction  conclude 
that  the  portion  of  total  cost  of  water-works  necessitated  by  fire 
service  is  as  shown  in  the  accompanying  curve  —  for  the  equation 
147 

z  =:  ~x™i~ 12>1* 

These  curves  are  to  be  regarded  as  showing  the  experience 
of  these  men  and  are  of  value  in  indicating  only  in  a  very  genera? 
way  what  may  be  expected  in  specific  cases. 

Per  Capita  Cost  of  Fire  Protection.  —  Messrs.  Metcalf , 
Kuichling  and  Hawley,  in  the  paper  referred  to,  have  used  the 
figures  already  shown  to  estimate  the  probable  per  capita  cost 
of  fire-protection  service  which  it  is  reasonable  to  expect  may 
prevail  in  most  ordinary  cases.  Their  results  are  best  shown  in 
the  accompanying  table,  which  is  self-explanatory. 


256 


PUBLIC  UTILITY  RATES 


ESTIMATED  APPROXIMATE  ANNUAL  PER  CAPITA  COST  OF  WATER-WORKS 
FIRE-PROTECTION  SERVICE 


Towns  of 
5000  Pop. 

Cities  of 
50,000  Pop. 

Largest 
Cities 

Per  capita  value  of  works  *  

$20 

$30 

$35 

Percentage  charged  to  fire  service.  . 

77 

32 

15 

Per  capita  value  charged  to  fire  service.  .  . 
Annual      operation      and      maintenance 
charges  t  

$15.40 
0.30 

$9.60 
0.28 

$5.25 
0.21 

Annual  retirance   and   interest    (8%)   on 
value  charged  to  fire  service  

1.23 

0.77 

0.42 

Total  annual  charges  per  capita  

1.53 

1.05 

0.63 

Annual  charges  for  fire  service  in  per  cent 
of  value  of  water-works  

7.6 

3.5 

1.8 

*  Value  here  indicates  reproduction  cost,  including  engineering,  contingencies,  organization, 
interest  during  construction,  and  business  development. 

t  For  the  towns  of  5000  population,  10%  of  annual  gross  income  which  is  15%  of  total  value  — 
or  1.5%;  for  cities  of  50,000  population,  7.5%  of  gross  income  which  is  12.5%  of  total  value —  or 
1.0%;  for  largest  cities,  6%  of  10%  —or  0.6%. 

Any  such  a  table  is  to  be  used  with  great  caution  and  in  a 
specific  case  has  little  weight  against  a  careful  determination 
by  a  competent  engineer.  The  most  it  should  be  taken  to  show 
is  that  the  annual  cost  per  capita  of  water-works  fire-protection 
varies  in  round  numbers  from  $0.40  to  $1.75  and  the  total  annual 
cost  to  the  community  may  be  expected  to  be,  say  from  1.5% 
to  10%  of  the  value  of  the  entire  water-works. 

What  is  the  Value  of  Fire-protection  Service.  —  At  the 
outset  these  notes  on  rates  for  fire-protection  service  were 
predicated  on  the  cost-of-service  idea.  In  some  cases  it  may  be 
worth  while  to  find  out  what  the  value-of-service  idea  discloses, 
for  probably  there  is  something  grossly  wrong  with  the  water- 
works where  the  cost  of  the  fire  protection  is  above  the  value. 

The  reports  of  the  National  Board  of  Fire  Underwriters  show 
insurance  rates  varying  from  2.46%  in  Nevada  to  0.53%  in  the 
District  of  Columbia.  Probably  at  least  half  of  this  difference 
is  due  to  the  protection  afforded  by  adequate  water  supplies  - 
and  the  other  half  perhaps  to  organized  fire-fighting  forces  and 
fire-resistant  construction.  If  all  the  combustible  property  in 
a  community  with  excellent  water-works  protection  were  insured 
(and  here  is  a  measure  of  the  cost  of  fire  risk)  according  to  the 
above  figures  about  0.95%  of  the  insured  value  would  represent 
the  total  annual  saving  in  cost  of  insurance  over  no  adequate 
fire  protection.  This  same  amount  may  be  directly  compared 


PROBLEMS  OF  WATER  RATES  257 

with  the  aggregate  annual  payment  made  by  the  community 
to  the  water  department  or  company.  Thus  in  New  York 
State  about  $6,000,000,000  of  fire  risks  are  underwritten  and 
this  is  probably  close  to  the  total  value  of  combustible  property. 
The  average  rate  for  the  State  is  0.82%,  which  gives  a  saving 
of  1.65%  over  Nevada  —  0.82%  being  probably  due  to  good 
water-works  fire  protection.  The  0.82%  of  $6,000,000,000  is 
$49,200,000;  and  for  a  population  9,000,000  represents  $5.50 
per  capita.  This  is  to  be  compared  with  about  $1.00  per  capita 
cost  of  water-works  fire  protection. 

Charges  for  Private  Fire  Protection.  —  The  charges  which  it 
is  proper  for  a  water  company  or  department  to  make  against 
a  customer  for  private  hydrants  or  hose  or  sprinkler  connections 
remains  one  of  the  most  troublesome  problems  of  water-works 
rate  making.  In  most  communities  the  number  of  private  fire- 
protection  connections  is  comparatively  small  and  the  amount 
of  water  drawn  (for  legitimate  purposes)  will  always  be  negligible. 
In  most  cases  it  will  be  advisable  to  put  on  a  detector  meter 
to  prevent  surreptitious  drafts  or  to  show  up  mistaken  connec- 
tions. 

Some  utility  men  have  urged  that  rates  for  this  service  should 
be  based  on  what  it  would  cost  the  private  consumer  to  fur- 
nish equivalent  protection  himself.  Others  advocate  a  charge 
based  on  the  saving  in  fire-insurance  premiums  that  can  be  traced 
to  the  fire-protection  facilities  connected  to  the  water-works 
system.  But  neither  of  these  schemes  can  be  universally  recom- 
mended for  in  the  great  majority  of  cases  such  a  procedure 
is  a  most  undesirable  resort  to  "  all  the  traffic  will  stand " 
without  regard  to  the  cost-of-service  principle  which,  especially 
in  such  a  public  benefit  as  fire  protection,  is  a  proper  basis. 

Where  the  private  fire-service  connections  are  numerous  and 
large  enough  to  increase  the  size  of  mains  over  requirements  for 
ordinary  domestic  or  manufacturing  supply  and  street-hydrant 
pressure,  they  may  well  be  studied  as  a  distinct  superimposed 
fire-protection  system  and  the  proper  charges  may  be  figured  as 
already  noted  in  connection  with  the  municipal  street-hydrant 
service.  Once  a  gross  lump  sum  is  determined  it  can  be  dis- 
tributed according  to  number  and  size  of  connections,  etc. 

In  many  places  it  may  prove  to  be  equitable  to  consider  the 
public  and  private  fire-protection  facilities  consolidated  into  a 


258  PUBLIC  UTILITY  RATES 

single  system  for  finding  the  extra  plant  required  prior  to  deter- 
mining a  gross  fire-protection  charge.  The  division  of  this 
charge  between  the  municipality  and  the  private  group  also 
can  be  fairly  approached  through  some  basis  of  number  and 
size  of  connections.  The  further  distribution  of  the  gross  sum 
applicable  to  the  private  group  can  similarly  be  apportioned; 
in  some  cases  it  may  appear  more  logical  to  apportion  this  gross 
sum  according  to  the  importance  of  the  private  connection  - 
measured  perhaps  by  number  of  hose  lines  or  number  of  sprinkler 
heads  connected,  though  these  ought  to  be  reflected  in  the  size 
of  the  fire-service  connection. 

If  it  should  be  regarded,  as  it  may  properly  be  in  many  cases, 
that  no  charge  should  be  made  against  the  private  fire  protection 
for  any  part  of  the  largest  mains  required  to  satisfy  the  public  fire 
department  (the  argument  being  that  sprinklers,  etc.,  are  more 
effective  fire  protection  than  hose  lines  from  public  hydrants  and 
materially  lighten  the  fire  department's  burdens)  then  the  fixed 
charges  that  can  be  assessed  are  only  those  on  the  extension 
from  existing  mains,  the  safety  shut-off  valves,  detector  meters, 
etc.  All  the  operating  expenses  that  can  be  fairly  levied  then 
cover  inspection,  maintenance,  meter  reading  and  related  items. 
Private  fire  protection  figured  on  such  a  basis  will  be  relatively 
very  inexpensive. 

Distributing  Costs  of  Comprehensive  System.  —  Obviously 
when  a  large  water-supply  system  supplies  several  communities 
in  a  given  district,  as  does  the  Boston  Metropolitan  Water  Board, 
a  pressing  problem  arises  as  to  the  fair  division  of  the  fixed  and 
operating  charges.  What  was  done  by  this  board  is  of  inter- 
est in  this  connection.  It  was  first  provided  that  in  general 
the  assessment  on  a  town  should  be  in  proportion  to  its  tax 
valuation  and  its  population;  water  consumption  was  later  sub- 
stituted for  population.  Boston's  share  was  laid  in  proportion 
only  to  the  ratio  of  its  valuation  to  the  total  valuation  of  the 
district,  towns  not  applying  for  water  or  obtaining  a  supply  from 
their  own  sources  being  entered  at  £  their  full  valuation.  The 
remaining  costs  were  apportioned  among  the  various  communi- 
ties f  according  to  valuation  and  ^  according  to  consumption. 

It  has  been  suggested  *  that  a  water  company  would  be 

*  J.  W.  Alvord,  Journal  of  the  Am.  Water- Works  Assoc.,  1914,  Vol.  1, 
p.  95. 


PROBLEMS  OF  WATER  RATES  259 

stimulated  to  keep  up  a  proper  fire-protection  equipment  if 
the  lump  sum  found  equitable,  as  already  noted,  should  be  ap- 
portioned over  the  company's  mains  as  an  annual  charge  pe,r 
"inch-foot"  of  main — feet  of  length  times  inches  in  diameter 
(plus  a  nominal  sum  per  hydrant).  This  has  the  advantage  also 
of  providing  easy  adjustment  of  annual  compensation  where  the 
system  is  still  extending.  Probably  for  a  rapidly  growing  plant 
it  would  be  advisable  to  revise  the  inch-foot  charge  about  once 
in  five  years. 

Cost  Accounting  for  Water-works.  —  The  need  of  more 
complete  regulation  of  the  water-works  of  the  country,  irrespec- 
tive of  their  having  private  or  public  ownership,  is  well  shown 
by  the  lack  of  comparable  data  on  operating  costs  around  the 
country,  and  in  the  lack  of  a  generally  accepted  or  generally 
imposed  uniform  system  of  accounts  such  as  are  used  by  prac- 
tically all  other  utilities.  Much  work  has  been  done  inside  the 
water-works  industry,  and  the  U.  S.  Census  Bureau  in  1908 
outlined  a  desirable  system  based  on  the"  work  of  water-works 
associations,  etc.* 

There  is  little  or  no  difficulty  in  assembling  from  such  a  sys- 
tem of  accounts  all  the  various  information  needed  in  computing 
the  cost  of  service  for  the  various  classes  of  customers  in  accord- 
ance with  the  general  scheme  previously  set  forth.  Inability 
to  secure  the  necessary  information  can  be  traced  generally  to 
lack  of  that  proper  system  of  service  and  financial  accounts 
which  enables  the  managers  to  comprehend  what  their  works  are 
actually  doing. 

Assuming,  however,  that  the  account  books  are  ample  for 
such  studies  as  may  be  needed  in  rate  studies,  only  a  few  hints  as 
to  handling  specific  items  are  necessary.  For  instance,  it  should 
be  known  how  much  water  is  supplied  to  the  municipality  itself, 
and  what  revenues  are  paid  over  to  the  water-works  definitely  for 
the  water  supplied  and  the  fire  protection  afforded.  It  may  be 
necessary  also  to  know  how  much  water  is  furnished  free  to 
charitable  institutions,  and  how  much  is  required  inside  the 
water-works  for  purification  and  other  operating  processes. 
All  costs  met  out  of  the  general  city  treasury  must  be  given  in 

*  M.  N.  Baker,  "Appendix  B,  Uniform  Accounts  and  Reports  of  Water- 
Supply  Systems";  Special  Report  of  U.  S.  Census  Bureau  of  Statistics  of 
Cities  of  over  30,000  Population,  1908. 


260  PUBLIC  UTILITY  RATES 

order  to  allow  intelligent  rate  study,  but  it  is  probably  imprac- 
tical to  try  to  cover  such  overhead  items  as  allowances  for 
service,  time  and  office  expenses  of  a  mayor,  councilmen  and 
their  subordinates.  Office  facilities  in  a  public  building,  etc., 
ought  properly  to  be  taken  account  of  even  though  it  involves 
no  cash  rental.  Where  the  city  comptroller,  or  equivalent  offi- 
cer, devotes  an  appreciable  part  of  his  time  to  the  water-works 
department,  that  should  be  covered  both  for  him  and  his  office 
force.  The  same  applies  to  the  city  engineers  and  bacteriol- 
ogists if  they  assist  the  works  superintendent. 

Special  attention  will  often  be  required  to  see  that  cost  of 
repairs  and  cost  of  renewals  are  fairly  differentiated.  The  mat- 
ter of  depreciation  is  also  apt  to  be  troublesome.  (U.  S.  Bureau 
of  Census  used  10  years'  life  for  horses,  carriages,  autos,  labora- 
tory fixtures,  meters;  15  years  for  office  furniture  and  general 
equipment;  20  years  for  boilers,  steam  lines,  filter  apparatus; 
25  years  for  pumping  machinery;  50  years  for  masonry,  cribs,  iron 
water  mains,  hydrants,  standpipes  and  buildings;  100  years  for 
aqueducts,  reservoirs,  tunnels;  50  years  for  a  system  as  a  whole.) 

Whether  taxes  are  to  be  included  for  a  municipal  plant  is  a 
debated  point  to  be  decided  as  a  local  issue;  in  any  event,  taxes 
are  seldom  entirely  escaped  for  a  municipality  may  pay  taxes  in- 
directly to  some  higher  civil  division  on  water-works  bonds,  etc. 

Preventing  Water  Waste.  —  Before  'meters  were  as  much  used 
as  now,  the  most  extravagant  claims  were  made  about  the  reduc- 
tion of  water  used  in  cities  —  through  prevention  of  waste  when 
customers  had  to  pay  for  it.  This  was  a  pretty  theory  but  after 
20  years  of  meter  use  it  was  found  *  that  the  consumption  in 
a  large  number  of  important  cities  had  not  been  checked. 

The  high  per  capita  use  of  water  is  in  most  places  affected 
by  other  uses  than  that  of  immediate  personal  consumption  or 
domestic  use,  and,  in  all  of  these,  great  chances  for  waste  exist 
that  are  not  caught  by  ordinary  customers'  meters.  These 
other  services  are  (1)  for  fires,  street  flushing,  fountains,  public 
schools,  and  various  municipal  consumption;  (2)  leakage  from 
mains  and  service  pipes,  and  seepage  from  storage  reservoirs; 
(3)  for  manufacturing  plants.  Moreover,  it  is  now  realized  that 

*  "New  Facts  on  Effect  of  Meters  on  Consumption  of  Water,"  by  W.  S. 
Johnson,  New  England  Water- Works  Association,  March,  1907;  Engineering 
News,  March  28,  1907. 


PROBLEMS  OF  WATER  RATES  261 

the  small  steady  leaks  in  ordinary  domestic  plumbing  are,  more 
often  than  not,  just  small  enough  so  that  the  meter  is  not  oper- 
ated by  that  flow. 

It  is  now  recognized  that  where  the  water  supply  is  not  of 
the  best,  as  regards  color  or  taste,  the  users  are  sure  to  let  their 
taps  run  in  hope  that  the  trouble  is  local  to  certain  service  or 
house  pipes.  Moreover,  the  trend  in  residences  is  to  the  mul- 
tiplication of  outlets  —  more '  bath  rooms,  hot-water  systems, 
lavatories,  toilets,  laundry  tubs,  quick-opening  faucets,  etc., 
even  in  modest  homes.  It  is  a  common  experience  in  all  utility 
service  that  the  more  convenient  the  facilities  for  service  the 
greater  the  use,  though  of  course  in  this  case  it  is  not  directly  in 
proportion  to  the  increase  in  number  of  outlets.  Various  cities 
show  the  influence  of  this.  Thus  Richmond,  Va.,  had  a  record 
of  about  170  gallons  per  capita  per  day  in  1890  and  as  the  per 
cent  of  meters  rose  from  zero  to  25  in  1898  the  per  capita  daily 
consumption  dropped  to  118  gallons.  But  the  movement  did 
not  continue  steadily;  in  1905  it  had  climbed  back  to  150  gal- 
lons though  the  percentage  of  metered  services  was  45.  Attle- 
boro,  Mass.,  in  1894  had  a  record  of  32  gallons  per  capita  per 
day  with  60%  of  services  metered;  in  1906  it  ran  48  gallons  and 
1-00%  metered. 

The  truth  evidently  is  that  the  extreme  waste  will  be  reduced  if 
there  is  a  meter  on  every  outlet  from  which  water  can  be  drawn, 
except  hydrants,  and  if  excessive  and  unreasonable  drafts  by  non- 
revenue  consumers,  like  schools,  hospitals,  public  buildings,  etc., 
are  persistently  checked.  In  such  ways  the  per  capita  daily  con- 
sumption probably  can  usually  be  brought  down  from  300-700 
gallons  (found  in. Burlington,  Vt.,  with  680  gallons  and  87^%  of 
taps  metered;  Portland,  Ore.,  with  325  gallons  and  24%  of  taps 
metered;  and  Sacramento,  Calif.,  with  318  gallons  and  100%  of 
taps  metered,  as  may  be  seen  in  the  accompanying  tables  of  rates 
and  service  in  American  cities)  to  50-150  gallons  (found  typically 
in  Des  Moines,  Iowa,  with  its  62  gallons  and  97%  of  taps  metered; 
in  Winthrop,  Mass.,  with  70  gallons  and  100%  metered;  in  Battle 
Creek,  Mich.,  with  80  gallons  and  100%  metered;  in  Aurora,  111., 
with  77  gallons  and  100%  metered;  and  Geneva,  N.  Y.,  with  53 
gallons  and  100%  metered).  But  the  reduction  of  consumption 
which  may  be  possible  to  below  100  gallons  per  capita  per  day 
evidently  does  not  directly  result  from  the  mere  presence  of  meters 


262  PUBLIC  UTILITY  RATES 

and  meter  rates;  for  Denison,  Tex.,  typically  shows  77  gallons 
with  87%  of  taps  metered;  Passaic,  N.  «L,  shows  98  gallons  for 
50%  metered;  and  Burlington,  Iowa,  shows  90  gallons  for  only 
5%  metered. 

The  great  use  of  meters  then  remains  as  a  means  of  selling 
water  service  more  nearly  in  accordance  with  the  cost  of  facili- 
ties furnished,  and  of  eliminating  extreme  waste. 

A  large  number  of  metered-service  rates  throughout  the 
country  are  made  in  a  simple  stepped  schedule  like  the  follow- 
ing example: 

For  0  to      2,000  cu.  ft.  per  quarter  $2. 20  per  1000  cu.  ft. 

2,000  to    10,000      "  "  1.40    "    1000     " 

10,000  to  100,000      "  "  0.40    "    1000      " 

100,000  to  200,000      "  "  0.20    "    1000      " 

Over  200,000      "  "  0.10    "    1000     " 

Useful  efforts  have  been  made  to  make  the  steps  smaller  so  as 
to  eliminate  the  waste  of  water  induced  by  users  who  natur- 
ally fall  close  to  a  dividing  line  and  who  by  wasting  a  little 
can  get  the  water  at  a  lower  rate  and  a  lower  total  bill  than  if 
they  used  less  water.  Thus: 
For 


Oto 

1,000  cu.  ft.  per  quarter  $2. 

20  per 

1000 

1,000  to 

2,000 

11 

It 

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This  reduces  the  trouble  by  reducing  the  inducement  to  waste. 
A  still  better  plan  is  seen  in  such  a  schedule  as  follows: 

First  1,000  cu.  ft.  per  quarter  $2. 20  per  1000  cu.  ft. 

Second  1,000      "  "  2.10    "    1000     " 

Third  1,000      "  "  2.00    "    1000     " 

Fourth  1,000      "  "  1.90    "    1000     " 

Fifth  1,000      "  "  1.80    "    1000    i' 


PROBLEMS  OF  WATER  RATES 


263 


Next         2,000  cu.  ft.  per  quarter  $1 .60  per  1000  cu.  ft 


1.40 

1000 

1.20 

1000 

1.00 

1000 

0.80 

1000 

0.60 

1000 

0.40 

1000 

0.20 

1000 

0.10 

1000 

3,000 
4,000 
5,000 
10,000 
20,000 
50,000 
100,000 
100,000 

The  objection  to  such  a  schedule  has  been  the  extra  labor 
and  time  required  to  compute  the  bill.  But  short  cuts  are  open 
making  the  calculation  about  as  easy  and  inexpensive  as  with 
any  schedule.  For  instance  a  table  can  be  made  up  in  an  hour 
or  so  which  the  billing  clerks -can  enter  at  any  point  and  com- 
plete the  calculation  in  a  moment.  Such  a  table  arranged  for 
the  schedule  just  given  might  be  as  follows: 

For  less  than  1000  cu.  ft.  reading,  multiply  by  $2.20. 

For  over  1000;  multiply  excess  by  $2.10  and  add    $2.20. 

For  over  2000;  multiply  excess  by  $2.00  and  add    $4.30. 

For  over  3000;  multiply  excess  by  $1.90  and  add    $6.30. 

For  over  4000;  multiply  excess  by  $1.80  and  add    $8.20. 

For  over  5000;  multiply  excess  by  $1.60  and  add  $10.00. 

For  over  7000;  multiply  excess  by  $1.40  and  add  $11.60.  Etc. 

Such  a  rate  schedule,  however,  is  not  the  most  logical  or  satis- 
factory that  can  be  derived,  as  appears  later. 

Minimum  Charges  for  Water.  —  Minimum  or  service  charges 
have  long  been  recognized  to  be  as  equitable  in  water-works 
practice  as  in  other  utilities.  Because  of  custom,  the  minimum 
charge  is  generally  found  easier  to  impose  on  water  customers 
than  the  service  charge.  There  has  not  been  as  much  study 
of  classifying  water  customers  as  there  has  been  in  electricity 
supply  so  that  some  hardships  of  overwide  averaging  are  often 
seen.  Substantial  justice  can  be  dealt  to  all  if  only  closer  at- 
tention is  paid  to  classification  such  as  perhaps  may  be  made  by 
size  of  service  pipe  or  size  of  meter.  The  annual  service  charge 
then  is  made  up  of  about  10%  of  the  investment  in  the  average 
cost  of  the  service  connection  and  meter  (assuming  that  the 
company  or  department  installs  them),  plus  the  average  cost 
of  metering,  bookkeeping  and  billing  —  say  $1.00  to  $1.50- 
plus  the  average  cost  of  unregistered  water.  The  first  and  third 
items  vary  for  each  class  more  than  the  second,  both  the  invest- 


264 


PUBLIC  UTILITY  RATES 


ment  and  the  unregistered  flow  through  the  meter  increasing 
with  the  size  of  connection.  The  expense  of  unregistered  flow 
could  be  computed  at  the  lowest  figure  charged  for  water  since 
it  is  an  all-day  leakage  and  does  not  appreciably  affect  peak 
drafts;  this  may  be  expected  to  run  from  $2  to  $200  per  year 
per  customer  with  water  at  a  minimum  of  10j£  per  1000  gallons. 
Unaccounted  water  has  been  studied  by  the  New  England  Water- 
Works  Association,  through  its  Meter  Committee.  They  were 
able  to  get  sufficient  data  on  29  systems  and  in  these  it  averaged 
27%  of  the  total  output. 

While  it  was  not  found  possible  to  separate  the  unaccounted 
amounts  into  (1)  leakage  from  mains,  (2)  leakage  from  services, 
(3)  under-registration  of  meters,  (4)  unmetered  services  like  street 
and  sewer  flushing,  these  were  recognized  as  the  causes  of  loss. 

It  was  recommended  that  service  charge  for  meters  should  be 
based  in  a  general  way  upon  their  carrying  capacity,  (1)  because 
of  the  interest  on  the  meter  and  service  pipe,  and  (2)  because  of 
the  leakage  past  the  meter.  Both  these  expenses  are  always 
present  and  dependent  on  the  size  of  meter.  The  responsibility 
for  leakage  past  the  meters  was  loaded  by  the  New  England  Asso- 
ciation Committee  (Allen  Hazen,  chairman)  upon  the  several  sizes, 
as  follows,  after  various  studies  of  the  delivering  capacity  and 
leakage  of  meters  in  service,  and  the  possible  distribution  of  un- 
accounted losses  among  services: 


Size  of  Meter, 
Inches 

Relative  Capacity 

Charge  for  Leakage 

1 

1.0 

$    2.00 

I 

1.7. 

3.40 

1 

3.0 

6.00 

1* 

6.0 

12.00 

2 

10.0 

20.00 

3 

20.0 

40.00 

4 

30.0 

60.00 

6 

60.0 

120.00 

When  it  is  advisable  to  use  a  minimum  rate  instead  of  a  bald 
service  charge,  the  conversion  is  simple.  Some  measurement 
or  estimate  must  first  be  made  of  the  average  quantity  most  apt 
to  be  drawn  by  the  minimum-rate  customers  of  the  given  classes. 
The  charge  for  that  water  is  to  be  made,  excluding  the  expense 
items  entering  the  service  charge,  and  then  added  to  the  service 


PROBLEMS  OF  WATER  RATES  265 

charge.  This  will  fix  a  minimum  charge  below  which  a  cus- 
tomer's bill  should  not  go.  It  can  be  so  stated,  or  it  can  be 
divided  by  the  average  draft  of  minimum-charge  customers 
for  a  given  class  and  that  rate  quoted  as  the  first  step  of  the 
schedule.  The  subsequent  steps  of  the  schedule  will  be  materi- 
ally less  of  course  since  they  are  not  burdened  with  the  serv- 
ice-expense items. 

Proposed  Standard  Rate  Form.  —  After  several  years  of  dis- 
cussion and  committee  reports,  the  New  England  Water-  Works 
Association  in  November,  1916,  adopted  a  standard  form  of  rate 
for  metered  service  —  comprising  (1)  a  fixed  charge  depending  on 
the  size  of  the  meter  and  (2)  a  varying  charge  proportional  to  the 
meter  reading  and  customer's  class.  The  committee's  proposed 
form  was  essentially  as  follows  : 

For  each  service  supplied  by  a  ......  inch  meter,  there  shall  be  a 

charge  for  the  service  and  meter  per  annum  (or  per  quarter,  or  per 
month)  of  $  ........... 

In  addition  thereto,  for  all  water  drawn  there  shall  be  charged: 
For  the  first  300,000  gallons  of  water  per  annum  (or  the  first  75,000 
gallons  per  quarter,  or  the  first  25,000  gallons  per  month,  or  the  first 
10,000  cubic  feet  per  quarter,  or  the  first  3300  cubic  feet  per  month)  the 

f  cents  per  1000  gallons  (or 
Domestic  Rate  of  ............  {  c^  ^  m  mb[c  ^ 

For  water  in  excess  of  300,000  gallons  (or  the  substitute  figures  quoted) 
and  under  3,000,000  gallons  (or  under  10  times  the  substitute  figures 

(cents  per  1000  gallons  (or 
quoted),  the  /fifarme&ofe  Rate  of  ...........  j  ^        m  cubic 


For  water  in  excess  of  3,000,000  gallons  per  year  (or  in  excess  of  10 
times  the  substitute  figures  quoted),  the 

„  ,       ,    ,     .      D  ,      .  f  cents  per  1000  gallons  (or 

Manufacturing  Rate  of  ..............  \  &  \ 

I  cents  per  100  cubic  feet). 

At  the  same  time  the  Association  accepted,  with  this  standard, 
a  suggestion  (adopted  only  as  such)  that  the  fixed  or  service  charge 
might  be  made  up  of  three  factors:  (1)  10%  of  the  cost  of  the 
meter  and  service  pipe,  where  those  were  owned  by  the  company; 
(2)  $1  per  year  for  reading,  billing  and  collecting;  and  (3)  from 
$2  to  $120  per  year  for  unregistered  water  leaking  through  the 
meter  —  depending  on  the  size  of  the  meter,  as  already  noted. 

Had  the  Association  generalized  this  mere  suggestion,  it  might 
have  become  an  integral  part  of  the  proposed  standard  rate  form. 


266  PUBLIC  UTILITY  RATES 

A  broader  statement  of  the  service  charge  might  have  been:  (1) 
X%  of  the  cost  of  meter  and  service  pipe,  (2)  Y%  of  the  cost  of 
equipment  needed  to  carry  the  peak  load  demand  of  customers, 
(3)  $A  per  year  for  reading,  billing  and  collecting,  and  (4)  from  $J5 
to  $C  per  year  for  water  passed  unregistered  through  the  'meter. 
The  actual  amounts,  X,  Y,  A,  B  and  C,  as  well  as  the  unit  price 
for  water  registered  on  the  meter,  would  be  determined  from  the 
accounts  of  the  company  or  department.  Y  would  be  highly  im- 
portant only  for  the  service  type  of  water-works,  as  contrasted 
with  the  product-storing  type  whose  peak-load  equipment  con- 
sists mainly  of  a  possible  addition  to  the  diameter  of  mains  —  and 
even  this  addition  may  be  considered  as  absorbed  by  the  provisions 
for  fire  protection. 

Such  a  rate  form  carried  to  its  logical  development  in  many 
cases  automatically  clears  away  much  of  the  worry  about  rates  to 
manufacturers.  If  one  of  these  industrial  customers  arranges  not 
to  draw  during  peak-load  hours,  then  the  Y  factor  disappears  and 
an  attractive  rate  can  be  made  to  him  that  still  will  render  a  re- 
spectable profit  to  the  water-works  —  or  when  profit  is  not  sought, 
make  a  more  continuous  use  of  plant  and  increase  the  spread  of 
some  of  the  fixed  charges.  If  a  manufacturer's  load  cannot  be 
secured  except  at  a  true  loss,  it  would  be  better  to  let  him  develop 
his  independent  supply.  The  development  of  the  two-part  water 
rate,  as  outlined  with  X,  Y,  A,  B  and  C  factors,  materially  reduces 
the  differences  between  the  domestic-,  intermediate-  and  manu- 
facturing-quantity charges,  and  often  even  make  the  three  dis- 
tinctions useless  and  unnecessary. 


PROBLEMS  OF  WATER  RATES 


267 


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PROBLEMS  OF  WATER  RATES 


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CHAPTER  XIV 
RATE  PROBLEMS   OF  GAS  UTILITIES 

Development  and  Magnitude  of  Gas  Industry.  —  While  there 
had  been  some  experimentation  with  distilling  gases  from  coal 
(such  as  by  Mincklers  at  Louvain  in  1784,  by  Dundonald  in 
England  in  1785,  and  by  Lebon  in  Paris  in  1786)  William  Mur- 
dock  is  commonly  accredited  originator  of  the  use  of  coal  gas  for 
illumination.  He  began  his  experiments  at  Redruth,  Cornwall, 
England,  in  1792.  In  1797  he  lighted  his  premises  at  Old  Cum- 
mock,  Ayrshire.  About  that  time  he  became  connected  with 
the  famous  firm  of  engine  builders,  Boulton  &  Watt  of  Soho, 
Birmingham,  England,  and  this  firm  built  a  large  generator  to 
make  gas  for  lighting  their  works.  There  was  a  public  display 
at  Soho  in  1802.  News  of  the  progress  of  Lebon's  experiments 
at  Paris  stimulated  the  firm  to  push  the  invention.  However 
it  was  due  probably  to  the  imagination  and  ingenuity  of  a  con- 
temporary, F.  A.  Winsor,  that  the  distribution  of  illuminating 
gas  from  a  central  station  was  then  started.  He  appears  to  have 
been  the  original  utility  promoter,  the  prototype  of  the  later 
generation.  After  many  rebuffs,  in  1812  a  gas  and  coke  company 
was  incorporated  in  London;  in  1813  Westminster  Bridge  was 
gas  lighted.  In  1813,  one  Samuel  Clegg  of  the  Boulton  &  Watt 
works  was  engaged  as  engineer  for  the  pioneer  concern,  the 
Chartered  Gas-Light  and  Coke  Co.  Clegg  is  credited  as  having 
invented  the  gas  meter,  pressure  governor,  cylindrical  holder, 
and  having  first  commercialized  city  gas  lighting  on  a  large 
scale. 

Before  the  second  London  gas  company  was  chartered,  Bal- 
timore in  1816  granted  a  charter  to  the  first  American  com- 
pany, and  here  also  the  first  American  gas  meters  were  made. 
Nevertheless,  the  real  history  of  American  gas  lighting  runs 
farther  back  than  the  Baltimore  project.  In  1806,  one  Daniel 
Melville,  of  Newport,  R.  I.,  lighted  his  premises  with  coal  gas 
made  in  his  own  apparatus.  In  1813  he  secured  a  patent  and 
built  a  plant  for  a  cotton  mill  in  Watertown,  Mass.  In  1822 

277 


278  PUBLIC  UTILITY  RATES 

Boston  adopted  the  innovation;  in  1823  a  company  was  or- 
ganized in  New  York  City,  and  in  1825  one  in  Brooklyn.  Gas 
was  introduced  in  New  Orleans  in  1835,  in  Philadelphia  and 
Pittsburgh  1836,  Louisville  1838,  Cincinnati  1841,  Albany  1845, 
and  in  other  cities  soon  after. 

Gas  was  a  great  success  in  both  house  and  street  illumination 

—  as  it  was,  up  to  1878,  unrivalled  as  a  means  of  central-station 
lighting.  The  electric  arc  appeared  in  that  year,  but  its  use  was 
restricted  and  not  until  after  1881  was  there  any  menace  of  com- 
petition; then  came  the  Edison  incandescent  electric  lamp. 
While  the  great  advantages  of  the  electric  lamp  in  safety,  heat- 
ing effect,  steadiness  of  illumination  and  easy  control  caused 
alarm  among  gas  men,  yet  the  history  of  both  systems  shows 
no  permanent  disaster.  Gas  lamps  were  improved  and  cheap- 
ened, and  with  reduced  prices  for  gas  came  greater  and  greater 
uses  for  it  as  a  special  fuel,  as  in  domestic  cooking,  in  small 
industrial  furnaces,  etc.  The  natural  fields  in  which  gas  and 
electricity  showed  their  special  advantages  slowly  defined  them- 
selves and  all  idea  of  one  completely  outrivaling  the  other  gradu- 
ally was  lost  by  about  1900.  Competition  in  lighting  service 
has  been  less  active,  no  doubt,  as  a  result  of  the  wide  consoli- 
dation in  the  past  15  years  of  gas  and  electric  concerns  into 
single  companies.  Under  present  conditions,  the  major  use  for 
gas  is  for  heating  of  one  sort  or.  another,  with  lighting  and  power 
as  minor  services;  the  major  uses  for  electricity  are  light  and  pow- 
er with  heating  quite  minor.  The  two  utilities  fit  well  together 
and  there  has  been  apparent  no  serious  public  hardship  in  their 
consolidation. 

The  last  government  census  of  the  American  gas  industry 
(1914)  shows  1183  gas  utilities  compared  with  about  the  same 
number  in  1909.  The  larger  number  (427)  produced  carburetted 
water  gas  —  90,017,725,000  cubic  feet  valued  at  $74,516,534. 
Straight  coal  gas  was  produced  in  274  plants  —  10,509,946,000 
cubic  feet  valued  at  $10,726,514.  Oil  gas  was  made  in  85  works 

-  roughly  8,300,000,000  cubic  feet  worth  $7,500,000;  and  mixed 
coal,  water  and  oil  gas  in  156  plants  —  86,281,339,000  cubic  feet 
valued  at  $72,012,021.  Finally  129  plants  made  acetylene  (not 
including  concerns  distributing  in  containers),  and  112  made 
gasoline  gas.  Of  the  last  two,  the  outputs  were  16,453,000  and 
181,412,000  cubic  feet  valued  at  $319,316  and  $254,718. 


RATE  PROBLEMS  OF  GAS  UTILITIES  279 

The  coke  and  byproducts  disposed  of  aggregated  $13,378,000 
in  value.  There  was  an  income  of  $20,815,800  from  resale  of 
purchased  gas,  and  $10,977,774  from  rental  and  sales  of  lamps 
and  heating  appliances. 

The  coke  retort  ovens  in  1914  made  61,364,375,000  cubic  feet 
of  gas,  valued  at  $6,009,600  —  compared  with  15,791,200,000 
cubic  feet  in  1907  worth  $2,609,200.  Of  this  1914  product, 
28,351,774,000  cubic  feet  was  sold  to  gas  utilities  for  $8,883,016. 

From  1909  to  1914  the  gas  companies  output  increased  by 
35.1%  in  quantity  and  26.3%  in  value.  The  quantity  of  coal 
gas  decreased  in  this  time  by  47.4%  and  gasoline  gas  by  16.3%. 
Carburetted  water  gas  increased  10.9%  and  mixed  coal  and 
water  gas  by  111.6%.  All-oil  gas  increased  91.1%,  due  to  growth 
of  the  industry  on  the  Pacific  coast. 

The  1914  income  of  these  1183  gas  utilities  (United  States 
only)  as  reported  by  the  census,  was  about  $165,330,000.  An 
estimate  of  the  value  of  property  then  used  in  their  service  is 
$1,040,000,000.  Current  estimates  of  the  status  of  the  gas  in- 
dustry for  1916  give  1350  plants  in  both  United  States  and 
Canada,  with  an  investment  of  $1,100,000,000,  and  an  output 
of  190,000,000,000  cubic  feet  per  year.  Of  all  these  companies 
only  some  125  are  municipal  utilities,  and  of  these  three  fourths 
are  small  concerns  producing  acetylene  and  gasoline  vapor  in 
places  unattractive  to  private  capital. 

The  gas-utility  business  cannot  be  discussed  without  some 
mention  of  the  natural-gas  output.  The  studies  of  the  U.  S. 
Geological  Survey  showed  that  for  1914  the  used  output  of  wells 
was  591,887,000,000  cubic  feet  worth  $94,115,524—2%  over 
the  year  previous.  Some  34%  was  supplied  directly  to  domestic 
consumers  at  an  average  of  28.04^  per  1000  cubic  feet;  66%  went 
to  commercial  customers  at  9.56^. 

Gas  Works  Technology.  —  Artificial  gas  fuel  for  domestic 
lighting  and  cooking  and  for  industrial  heating  is  manufactured 
at  a  central  plant  and  distributed,  at  a  pressure  of  a  few  ounces 
per  square  inch,  in  iron  or  steel  pipes  under  street  pavements, 
etc.  The  gas  may  be  transmitted  in  long  mains,  or  in  feeders  at 
higher  pressures  to  reducing  stations  feeding  the  distributing 
mains.  From  the  mains  there  branch  off  service  lines  to  the 
private  premises.  A  meter  is  interposed  between  the  service 
line  and  the  house  piping.  For  lighting,  the  oldest  and  simplest 


280  PUBLIC  UTILITY  RATES 

burners  were  simple  slot  orifices  supporting  an  open  flame. 
These  have  been  largely  supplanted  now  by  the  more  eco- 
nomical Welsbach-type  burners  —  high-temperature  Bunsen 
burners  with  a  mantle  of  refractory  rare  oxides  surrounding 
the  flame.  Gas  stoves  for  domestic  cooking  are  but  adaptations 
of  Bunsen-burner  groups  in  which  a  complete  and  smokeless 
combustion  is  secured.  Industrial  gas-fired  furnaces  largely 
employ  Bunsen  burners  though  using  large  amounts  of  gas. 

Evidence  points  to  the  facts  that  (1)  for  lighting,  the  old  open 
flame  burners  are  steadily  going  out  of  use,  (2)  the  greater  part 
of  the  gas  used  today  in  American  towns  and  cities  is  for  heating 
appliances  of  one  sort  or  another.  A  good  example  of  this  is 
afforded  by  a  careful  survey  made  by  the  gas  company  in 
Middletown,  N.  Y.*  Summed  up,  the  results  showed  that  of 
1139  consumers,  46%  used  gas  only  for  cooking  or  heat;  65% 
used  all  their  gas  in  a  way  for  which  calorific  value  controlled 
—  as  in  heating  appliances  and  mantle  burners;  6%  used  no 
lighting  gas  in  mantles,  and  5%  used  no  gas  for  cooking  and 
heating. 

The  majority  of  open-flame  burners  in  place  were  for  occasional 
use  such  as  in  cellars,  spare  rooms,  storehouses,  etc.,  where  the 
greater  ruggedness  and  readiness  of  the  simple  open  flame  over- 
comes its  lack  of  economy  and  where  the  candle-power  of  the 
flame  is  a  very  minor  matter.  In  a  large  city  there  are  undoubt- 
edly proportionately  more  open  flame  burners  than  in  the  smaller 
places  but  this  is  offset  by  the  greater  use  of  industrial  heating 
appliances. 

It  is  probably  true  that  90%  of  the  gas  output  of  the  country 
is  used  in  Bunsen-type  burners.  When  this  situation  is  uni- 
versally recognized  there  will  be  a  general  discarding  of  the 
public  requirements  that  the  gas  supply  have  a  certain  candle- 
power  value  (when  burned  at  a  specified  rate  in  an  open  burner). 
For  this  will  be  substituted  the  requirement  of  heat  units  re- 
leased in  the  combustion  of  a  given  quantity.  This  will  re- 
lieve gas  works  of  the  uneconomical  burden  of  enriching  their 
output  with  high  illuminants,  and  tend  toward  the  desirable 
end  of  cheaper  gas.  When  gas  is  held  at  high  pressures  or  low 
temperatures,  or  when  forced  through  long  lines  at  moderate 

*  Reported  by  C.  H.  Stone,  Proceedings  of  the  American  Gas  Institute, 
1913,  p.  76. 


RATE  PROBLEMS  OF  GAS  UTILITIES  281 

pressures  and  temperatures,  the  changes  in  candle-power  are 
much  greater  than  in  calorific  value. 

At  the  gas  manufacturing  plant  any  one  or  more  of  several 
processes  may  be  found.  The  simplest  and  oldest  consists  in 
the  destructive  distillation  of  bituminous  coal,  making  it  yield 
up  its  volatile  hydrocarbons  as  fixed  gases  and  leaving  a  residue 
of  solid  carbon  and  ash  —  coke.  The  coal  is  charged  into  re- 
torts, commonly  large  horizontal  closed  fireclay  tubes  projecting 
into  or  passing  through  a  furnace  burning  coke,  coal  or  even 
gas.  In  recent  years  inclined  and  vertical  retorts  have  been 
introduced  to  treat  the  coal  in  larger  quantities  and  at  reduced 
cost  of  handling.  The  gas  .as  generated  is  drawn  from  the  re- 
torts and  passed  through  a  closed  water-loaded  trough  where 
it  deposits  much  of  its  tar  and  oil  vapor.  It  passes  through 
tar  extractors,  vapor  condensers,  and  a  series  of  purifying 
and  byproduct-recovery  washers  and  scrubbers;  finally  it  goes 
through  a  station  meter  and  into  the  holders  and  mains. 

Some  4  to  6  cubic  feet  of  gas  can  be  made  from  a  pound  of 
coal.  It  consists  typically  of  about  30-40%  methane,  5-8% 
heavy  hydrocarbons,  40-50%  hydrogen,  2-15%  carbon  monoxide 
and  1-3%  nitrogen.  The  byproducts  of  value  are  coke,  tar 
oils  and  pitches,  ammonia,  and  cyanides;  their  recovery  is  of 
importance  to  utility  customers  so  far  as  it  decreases  the 
net  cost  of  gas.  A  notable  advance  has  been  the  use  of  by- 
product-recovery coke  ovens  in  connection  with  the  manu- 
facture of  illuminating  gas.  In  these,  coke  of  a  superior  quality 
is  made  in  great  quantities,  and  the  surplus  gas  from  the  dis- 
tillation is  saved  instead  of  burned  in  the  open  air  as  with  the 
old  beehive  coke  ovens.  Often  only  gas  secured  in  the  early  part 
of  the  coking  period  is  rich  enough  to  replace  the  older  coal  gas; 
gas  from  the  last  stages  of  the  process  then  is  of  low  calorific  and 
illuminating  value  and  it  must  be  used  solely  as  special  fuel  and 
not  discharged  into  the  mains.  It  is  possible,  however,  to  utilize 
all  the  gas  from  these  ovens  and  this  is  done  in  some  places.* 

*  Use  of  coke-oven  gas  introduces  a  difficult  problem  in  gas-rate  making> 
for  the  return  to  be  allowed  on  an  industrial  and  non-utility  plant  like  coke 
ovens  is  not  easily  fixed.  Even  the  actual  cost  of  the  oven  gas  is  a  matter 
of  debate  —  depending  on  whether  the  gas  or  the  other  products  are  to  be 
regarded  as  the  main  output  and  to  bear  the  fixed  charges.  When  oven  gas 
is  bought,  any  purchase  price  notably  below  the  cost  of  making  coal,  water, 
oil  or  mixed  gas  is  apt  to  be  regarded  as  reasonable. 


282  PUBLIC  UTILITY  RATES 

An  illuminating  gas  is  made  out  of  coal,  steam  and  oil.  Coal 
or  coke  is  burned  with  a  deficiency  of  air  in  a  gas  generator 
yielding  carbon  monoxide,  which  is  later  burned  to  dioxide  in 
passages  filled  with  refractory  checkerwork  —  the  superheater 
and  carbureter.  When  maximum  temperature  is  reached  all 
the  air  is  shut  off  and  steam  is  turned  on  under  the  generator 
grates.  The  water  vapor  is  split  up  and  finally  a  mixture  of 
hydrogen  and  carbon  monoxide  secured  in  the  first  checkerwork 
or  carbureter.  Oil  is  sprayed  in,  to  be  converted  to  a  fixed 
gas  in  the  superheater.  This  is  carried  on  nearly  until  the 
temperature  of  fuel  bed  and  checkerwork  are  too  reduced  in 
temperature  to  function  as  intended.  Then  steam  is  turned  off, 
air  put  on  and  the  cycle  repeated  — giving  a  series  of  "blows" 
and  "runs."  This  gas  burns  with  a  whiter  and  more  brilliant 
flame  than  coal  gas,  and  the  illuminants  are  fixed  gases  which 
do  not  condense  out  much  under  reduced  temperature  or  in- 
creased pressure.  In  such  a  gas  the  carbon  monoxide  consti- 
tutes about  31%,  the  unsaturated  hydrocarbons  14%,  the  satu- 
rated hydrocarbons  16%,  hydrogen  32%,  the  rest  being  mostly 
nitrogen  and  carbon  dioxide. 

Where  coal  is  expensive  and  oil  plentiful,  as  in  California, 
an  illuminating  gas  is  produced  with  oil,  air  and  steam  alone. 
In  the  production  of  the  all-oil  water  gas,  the  generators  con- 
sist of  two  upright  shells,  one  short  and  the  other  tall,  both  filled 
with  fire-brick  checkerwork.  The  short  shell  serves  as  the 
generator  and  the  long  shell  as  the  superheater.  The  discharge 
lor  heating-blast  gases  is  at  the  top  of  the  second  shell;  the 
take-off  for  illuminating  gas  is  at  the  middle  of  the  same  shell. 
In  operation,  oil  and  steam  are  blown  into  the  top  of  the  gen- 
erator shell  and  air  blast  is  admitted  at  the  center.  After  a 
heating  period  of  12  minutes  the  blast  is  turned  off,  additional  oil 
and  steam  let  in  at  the  top  of  the  second  shell,  and  gas  taken  off 
to  the  purifiers  and  scrubbers.  The  injection  of  oil  is  rapid  at 
first  but  is  diminished  steadily  for  8  minutes.  .There  is  a  final 
2-minute  period  to  the  run  when  only  steam  is  injected  —  to 
clean  the  shells.  This  gas  more  nearly  resembles  coal  than  water 
gas.  These  machines  have  many  points  of  advantage  affecting 
gas  rates.  They  can  be  made  in  large  units  so  that  labor  costs 
are  diminished,  and  no  time  is  lost  in  removing  ash  and  clinker. 
They  can  be  worked  continuously,  and  a  reduction  in  holder 
capacity  might  be  expected,  though  it  has  not  been  observed. 


RATE  PROBLEMS  OF  GAS  UTILITIES  283 

The  price  of  gas  oil,  in  the  eastern  states  at  least,  has  continu- 
ally increased  and  so  much  as  to  cause  uneasiness  of  operating 
men  as  to  their  ability  to  produce  gas  without  general  increases 
in  rates  that  would  discourage  business.  It  seems  probable 
therefore  that  less  and  less  oil  will  be  used  especially  as  its  bene- 
fit beyond  a  certain  point  is  largely  in  increasing  candle-power 
rather  than  calorific  value. 

Gas  service  is  now  universally  metered,  except  for  definite  use 
of  street  lamps.  There  were  a  few  early  attempts  to  rely  on 
flat  rates  but  they  did  not  long  persist.  Indeed  one  of  the  im- 
portant inventions  of  the  pioneer  gas  engineer,  Samuel  Clegg,  was 
a  bellows  gas  meter.  The  most  common  type  of  meter  is  a 
large  tin  case  with  two  compartments  separated  by  a  tight 
diaphragm,  each  chamber  having  a  bellows  alternately  con- 
nected to  the  service  and  house  pipes  by  a  slide  valve  and,  in 
emptying  and  filling,  working  a  train  of  gears  which  records  the 
displacement.  There  are  other  meters,  like  the  rotary- vane  type, 
though  in  somewhat  less  extended  use. 

Uniform  Rate  Persists.  —  Long  before  scientific  rate  making 
was  attempted,  the  gas  utilities  were  engaged  in  stiff  competi- 
tion with  the  invader  electricity,  under  which  conditions  per- 
sistence of  the  simple  uniform  rate  was  not  unexpected.  Even 
when  it  was  realized  that  this  burdened  the  largest  customers 
for  the  benefit  of  the  smallest,  it  appears  to  have  been  feared 
that  a  sliding  schedule  would  seriously  discourage  the  small 
users  and  interrupt  the  business.  Some  such  feeling  persists 
today  but  is  fading  —  owing  to  experience  under  commission- 
made  sliding  schedules  and  to  deeper  study  by  the  gas  men 
themselves. 

.Accurate  data  as  to  the  amount  of  discrimination  existing 
through  single-unit  prices  is  not  at  hand,  but  a  few  opinions 
based  on  experience  have  been  published.  Some  report  *  that 
two-thirds  of  the  customers  carry  the  other  third.  One  state- 
ment f  is  to  the  effect  that  one-third  of  the  customers  do 
not  pay  their  expenses,  one-third  do  not  pay  any  profit,  and  one- 
third  pay  the  profit  for  the  other  two-thirds  plus  some  of  the 
cost  of  one-third.  But  it  appears  that  the  fair  increase  in 
charges  to  the  unprofitable  two-thirds  need  not  be  large. 

*  A.  S.  Miller,  Proceedings,  Am.  Gas  Inst.;    1913,  p.  197. 
t  A.  E.  Forstall,  Proceedings,  Am.  Gas  Inst.:   1913,  p.  203. 


284  PUBLIC  UTILITY  RATES 

The  reaction  in  a  few  gas  men's  minds  has  been  so  great, 
however,  that  the  mental  pendulum  has  swung  far  in  the  other 
direction  and  more  cost  items  are  often  advocated  loaded  upon 
the  small  customer  and  upon  the  customer's  demand  than  can 
be  supported  with  reason.  One  reason  why  the  urged  move- 
ment away  from  a  uniform  price  is  sometimes  over-violent  is 
probably  due  to  the  misconception  which  some  may  have  that  all 
the  fixed  charges  are  to  be  allocated  over  customers  in  accord- 
ance with  their  maximum  demands  —  irrespective  of  whether 
a  part  of  the  investment  is  working  steadily  against  storage 
regardless  of  peak  loads.  If  a  division  of  plant  is  working 
steadily  the  fixed  charges,  including  retirance,  can  fairly  be  com- 
bined with  labor,  supplies,  repairs,  etc.,  and  apportioned  over 
the  output  of  that  division.  Only  when  there  is  a  marked  peak 
load  on  a  division  —  or  would  be  if  the  no-load  valleys  were  not 
filled  with  low-price  service  won  by  competition  with  other 
kinds  of  service  —  can  it  logically  be  regarded  that  apparatus 
is  reserved  to  meet  the  customers'  demand,  and  that  the  fixed 
charges  on  such  equipment  are  to  be  apportioned  on  the  basis 
of  demand.  If  there  is  a  small  peak  effect  there  can  be  a  small 
apportionment  of  fixed  charges  upon  demand  and  a  large  one 
upon  output. 

To  illustrate:  the  gas  manufacturing  plant  is  commonly  de- 
signed to  meet  the  maximum  daily  output  —  about  ^^  to  ?kv 
of  the  aggregate  annual  output,  instead  of  3£y  for  no  peak  at 
all.  The  distributing  system  is  designed  to  carry  the  maximum 
hourly  draft,  which  is  7T^T  to  55V<y  of  the  aggregate  annual 
output,  instead  of  the  ^7Vu  for  n<>  peak  demand.  About  half 
the  cost  of  the  works  is  in  the  distribution  system.  Under 
these  conditions  it  often  may  be  sufficient  to  hold  that  all  the 
fixed  charges  on  the  manufacturing  and  storage  division  may  be 
lumped  with  operating  costs  and  spread  over  the  entire  output; 
while  all  the  fixed  charges  on  the  distribution  half  of  the  plant 
may  be  assessed  on  the  basis  of  customers'  demand  or  size  of 
meter  (increased  or  diminished  by  the  ratio  of  peak  hourly 
draft  to  aggregate  maximum  capacity  of  meters).  If  a  closer 
approximation  to  ideal  charges  is  attempted,  it  would  be  to  ap- 
portion 31.5%  of  the  fixed  charges  on  the  manufacturing  divi- 
sion according  to  customers  maximum  demand,  or  to  some 
equivalent  (the  excess  capacity  required  for  the  typical  peak 


RATE  PROBLEMS  OF  GAS  UTILITIES  285 

is  31.5%  of  the  actual  capacity),  and  68.5%  according  to  out- 
put. Then  77.3%  of  fixed  charges  on  the  distribution  division 
would  properly  be  assessed  on  demand  and  22.7%  on  output 
(since  the  excess  capacity  of  mains  is  77.3%  of  the  steady-flow 
requirement) . 

Some  would  favor  apportioning  all  the  fixed  charges  on  holders 
to  the  customers'  demand  —  on  the  ground  that  if  there  was 
no  peak  demand  at  all  there  would  need  be  no  holder.  In  many 
cases,  however,  the  gas  holder  has  a  storage  capacity  equal  to 
the  daily  manufacturing  capacity  and  in  few  cases  probably 
does  it  fall  below  85%  of  the  latter.  Therefore  there  is  good 
reason  for  considering  it  a  part  of  the  manufacturing  plant. 
If  the  capacity  is  85%  of  the  daily  manufacturing  capacity,  or 
3^5  of  the  annual  output,  then  19.6%  of  the  fixed  charges  on 
the  holder  might  go  to'  demand  and  80.6%  to  output,  instead 
of  in  proportion  to  the  31.5%  and  68.5%  holding  for  the  rest 
of  the  manufacturing  plant. 

It  would  be  fair  then  to  charge  a  customer  a  sum  more  or 
less  depending  on  the  size  of  his  meter,  plus  a  sum  depending 
on  the  meter  reading,  and  plus  a  customer  charge  for  meter 
reading,  billing,  etc.  (about  $0.50  per  month  is  commonly  found 
to  cover  these).  If  these  fixed  and  customer  costs  be  spread 
over  only  the  first  one,  two,  three  or  four  thousand  cubic  feet 
of  gas  (depending  on  the  size  of  the  meter)  there  is  not  found 
such  an  initial  price  that  small  consumers  need  be  scared  away. 
An  easy  way  to  change  over  from  the  common  uniform  metered 
rate  to  a  logical  system  is  to  establish  a  transition  period  in  which 
there  is  for  all  a  high  price  for  the  first  1000  cubic  feet,  then  a  lower 
charge  for  the  next  3000  cubic  feet  and  a  still  lower  one  for  the 
next  6000,  etc.  This  has  been  done  in  Wisconsin. 

In  an  altogether  new  place,  or  in  an  old  one  after  the  transi- 
tion period  is  past,  the  high  rate  may  apply  to  the  first  X  1000 
cubic  feet  —  X  depending  on  the  size  of  the  meters  installed  or 
some  equivalent  way  of  measuring  maximum  demand.  The 
high  rate  for  X  1000  cubic  feet  would  cover  the  customer  and  de- 
mand charges  and  might  be  accompanied  by  a  minimum  charge 
to  insure  their  receipt. 

Variation  in  Gas  Cost  for  Large  Use.  —  How  the  quantity  of 
gas  used  by  different  customers  can  change  the  true  unit  cost  may 
be  illustrated  in  a  hypothetical  case  where  the  output  cost  was 


286 


PUBLIC  UTILITY  RATES 


assumed  to  be  60^  per  1000  cubic  feet,  and  the  customer  cost  was 
taken  as  follows: 

3-light  meter 180  per  month. 


5- 
10- 
20- 
30- 

45- 
60- 


210 
240 
270 
320 
410 
500 


The  demand  costs  were: 


3-light  meter $     4.00  per  year 


5-  "               9.00 

10-  "  "      20.00 

20-  "  "     35.00 

30-  "  "     50.00 

45-  "  "      90.00 

60-  "  "     130.00 

Then  the  cost  to  customers  would  decrease  thus: 


Size  of  Meter 

Cu.  Ft.  per 
Month 
per  Month 

Cus- 
tomer 
Cost 

De- 
mand 
Cost 

Output 
Costs 

Total 
Cost 

Cost 
per 
1000 
Cu.  Ft. 

Pub- 
lished 
Rate 

Minimum 
Monthly 
Bill 

3-light  .... 

1,000 

$0.18 

$0.33 

$1.20 

$1.11 

$1.11 

$1.15 

$0.60 

5- 

3,000 

0.21 

0.75 

2.70 

2.76 

0.92 

0.95 

1.15 

10- 

8,000 

0.24 

1.66 

6.00 

6.70 

0.84 

0.85 

2.30 

20- 

17,500 

0.27 

2.90 

10.50 

13.67 

0.78 

0.78 

3.75 

30- 

25,000 

0.32 

4.15 

15.00 

19.47 

0.78 

0.78 

5.50 

45- 

50,000 

0.41 

7.50 

30.00 

37.91 

0.76 

0.76 

9.90 

60- 

75,000 

0.50 

10.80 

45.00 

56.30 

0.75 

0.74 

14.30 

Gas-utility  Accounting.  —  Through  the  control  exercised  by 
state  commissions  over  gas-companies,  satisfactory  and  uni- 
form accounts  in  recent  years  have  been  more  employed  than 
before.  The  matter  has  also  been  studied  by  the  organizations 
of  the  industry.  Possibly  not  as  much  has  been  done  as  with 
electric  and  street-railway  accounts,  but  certainly  more  than  in 
the  water-works  field.  The  adopted  standard  accounts  will 
permit  of  the  analysis  of  cost  items  as  laid  down  in  the  general 
notes  on  cost  of  service.  Little  more  needs  to  be  said  about 
building  up  a  schedule  of  true  costs  under  demand,  output  and 
customer  heads  beyond  that  just  given  in  connection  with  pro- 
portioning the  fixed  charges  for  the  manufacturing  and  distrib- 
uting divisions.  It  may  be  well  to  recall,  however,  that  the 


RATE  PROBLEMS  OF  GAS  UTILITIES  287 

customer  charge  should  include  interest,  depreciation  and  re- 
pairs on  meters  and  service  lines.  Some  managers  would  push 
their  analysis  so  far  as  to  separate  from  the  customer  charge, 
and  place  in  the  output  group,  a  portion  of  interest,  depreci- 
ation and  repairs  on  meters  and  services,  depending  on  the 
capacity  ratio  of  a  no-peak-load  equipment  to  the  actual.  These 
distinctions  may  be  justified  in  some  places  but  the  amounts  are 
not  large  enough  to  cause  very  great  differences  in  rates. 

Some  accounting  difficulties  are  encountered  when  a  single 
concern  gives  both  gas  and  electric  service.  The  majority  of 
expense  items  entering  into  a  study  of  the  cost  of  service  can  be 
directly  apportioned  to  the  proper  department.  But  there  is 
a  class  of  expenses,  the  "overhead"  or  "indirect"  costs,  which 
are  not  directly  assignable  on  any  physical  evidence.  It  is 
common  to  apportion  them  between  the  two  departments  ac- 
cording to  the  ratio  of  the  direct  expenses.  Such  a  practice  is 
justified  on  the  ground  that  each  increment  of  direct  expense 
leads  to  a  proportionate  increment  in  the  overhead;  in  other 
words,  the  overhead  expenses  depend  on  the  relative  activities 
and  magnitudes  of  the  two  branches,  and  these  in  turn  are  well 
measured  by  the  aggregates  of  the  direct  expenses.  Such  prac- 
tice has  been  permitted  by  the  Wisconsin  and  other  state  com- 
missions, and  is  very  similar  to  the  apportionment  of  unassign- 
able items  in  railway  accounts  practiced  by  the  Interstate 
Commerce  Commission.  Such  a  division  of  overhead  costs  be- 
tween two  departments  is  based  on  the  assumption  that  the  two 
utilities  are  fairly  similar  in  their  administration,  financing,  char- 
acter of  business,  etc.  When  that  is  not  approximately  true 
it  may  be  advisable  to  devise  some  modified  or  substitute  ap- 
portionment based  on  the  demands  of  local  conditions. 

Natural-gas  Utilities.  —  Natural  gas  of  high  calorific  value  is 
sold,  in  districts  within  piping  distance  of  the  oil  and  coal  regions 
where  gas  may  be  obtained,  at  rates  usually  beyond  competition 
of  manufactured  gas.  There  are  no  raw  materials  to  be  con- 
sumed and  handled,  and  there  is  no  manufacturing  plant  to  con- 
tribute fixed  charges  (though  there  are  wells  and  collecting  lines) . 
But  in  spite  of  this,  natural  gas  is  no  free  gift  of  nature  as  it 
comes  to  the  consumer's  premises,  and  its  use  is  not  unchal- 
lenged. Natural  gas  varies  in  composition  markedly  according 
to  the  field;  its  value  depends  on  its  content  of  methane  (50 


288  PUBLIC  UTILITY  RATES 

to  90%)  and  hydrogen  (5  to  35%).  The  Baltimore  artificial- 
gas  low-rate  new-business  campaign  of  1916  was  based  on  the 
assumption  and  argument  that  the  high  hydrogen  content  and 
the  impurities  of  natural  gas  made  it  necessary  to  lead  the 
burned  gases  off  with  higher  temperatures  and  more  water 
vapor  so  that  the  artificial  gas  became  economical  in  spite  of 
its  lower  heat  value  (600  B.t.u.  per  cubic  foot  instead  of 
1100). 

A  company  supplying  natural  gas  has  no  manufacturing  plant 
or  holders  but  its  wells  and  distributing  works,  constituting 
about  all  the  physical  plant,  have  to  be  large  enough  to  permit 
peak-load  flow  with  good  service  conditions  as  to  pressure,  fluc- 
tuation, etc.  The  rates  that  can  be  made  therefore  should 
vary  as  markedly  for  long  hours  of  use,  small  peak  and  off-peak 
drafts  as  does  electric  central-station  service.  The  rate  of  re- 
turn to  be  allowed  a  natural-gas  utility  in  justice  must  be  con- 
siderably higher  than  for  an  artificial-gas  concern  or  an  electric 
company,  or  else  the  earnings  must  be  large  enough  to  give 
heavy  amortization  of  investment.  This  results  from  the  in- 
herent hazards  of  the  natural-gas  business.  It  is  essentially  a 
mining  venture  with  most  of  the  usual  uncertainties.  Promising 
ground  has  to  be  secured,  and  money  sunk  in  prospecting; 
soon  after  the  field  lines  have  been  laid  down  the  supply  may 
give  out. 

A  good  example  of  natural-gas  rates  is  shown  in  the  accom- 
panying 1915  schedule  of  the  Louisville  (Ky.)  Gas  and  Electric 
Co.*  Here  an  effort  was  made  to  have  the  rates  include  proper 
demand  and  customer  charges,  although  not  announced  as  such. 
The  schedule  was  not  quite  ideal  but  was  forced  as  a  compromise 
measure  in  place  of  smoother  scale  and  a  .service  charge.  It 
is  reported  that  both  company  and  consumers  are  satisfied. 

LOUISVILLE  GAS  AND  ELECTRIC  Co. 
NATURAL  GAS  RATES.     Effective  March  4,  1915. 

The  following  will  be  the  classification  under  which  consumers  will  be  sup- 
plied with  natural  gas: 

SCHEDULE  A.  —  Domestic  consumers,  gas  engine  consumers  and  other 
consumers  who  require  continuous  service. 

*  As  described  by  Donald  McDonald  before  the  Natural-Gas  Association, 
in  the  paper  "Equitable  Rates  For  Natural  Gas";  see  "Gas  Age"  June  15, 
1915. 


RATE  PROBLEMS  OF  GAS  UTILITIES  289 

Rate.  —  For  the  consumption  in  one  month  of  — 

100  cu.  ft.  or  less $0.40  1,100  cu.  ft $0.83 

200  cu.  ft 0.47  1,200  cu.  ft 0.83 

300  cu.  ft 0.62  1,300  cu.  ft 0.94 

400  cu.  ft 0.62  1,400  cu.  ft. 0.94 

500  cu.  ft 0.62  1,500  cu.  ft 1.02 

600  cu.  ft 0. 62  1,600  cu.  ft 1 .08 

700  cu.  ft 0.72  1,700  cu.  ft 1.16 

800  cu.  ft 0.72  1,800  cu.  ft 1.21 

900  cu.  ft 0.72  1,900  cu.  ft 1.33 

1,000  cu.  ft 0.72  2,000  cu.  ft 1.33 

All  additional  gas  over  the  first  2,000  cu.  ft.  per  month  at  the  rate  of  38.88 
cents  per  1,000  cu.  ft. 

Cash  Discount.  —  A  discount  of  10  per  cent  will  be  allowed  for  payment  of 
bills  within  ten  days  from  their  date. 

SCHEDULE  B.  —  Commercial  consumers  who  do  not  require  contin- 
uous service,  who  are  prepared  and  willing  to  substitute  other  fuel  on  short 
notice,  and  who  agree  to  have  their  supply  of  gas  shut  off  either  temporarily 
or  permanently  for  the  purpose  of  giving  Schedule  A  consumers  sufficient 
supply  of  gas. 

Rate.  —  Based  on  monthly  consumption  — 

First  200,000  cu.  ft.  at  38.88  cents  per  1,000  cu.  ft. 

Next  200,000  cu.  ft.  at  33.33  cents  per  1,000  cu.  ft. 

Next  200,000  cu.  ft.  at  22.22  cents  per  1,000  cu.  ft. 

All  over  600,000  cu.  ft.  at  13.33  cents  per  1,000  cu.  ft. 

Cash  Discount.  —  A  discount  of  10  per  cent  will  be  allowed  for  payment 
of  bills  within  ten  days  from  their  date. 

NOTE.  —  Consumers  served  at  Schedule  B  rate  whose  consumption  is  less 
than  100,000  cu.  ft.  shall  revert  to  Schedule  A  rate. 

SCHEDULE  C.  —  Industrial  consumers  whose  monthly  consumption  is 
not  less  than  200,000  cu.  ft.  who  do  not  require  continuous  service  and  who 
are  prepared  and  willing  to  substitute  fuel  on  short  notice  and  who  agree  to 
have  their  supply  of  gas  shut  off  either  temporarily  or  permanently  for  the 
the  purpose  of  giving  Schedule  A  and  Schedule  B  consumers  sufficient  supply 
of  gas. 

Rate.  —  Based  on  monthly  consumption  — 

First  100,000  cu.  ft.  at  38.88  cents  per  1,000  cu.  ft. 

Next  100,000  cu.  ft.  at  22.22  cents  per  1,000  cu.  ft. 

All  over  200,000  cu.  ft.  at  13.33  cents  per  1,000  cu.  ft. 

Cash  Discount.  —  A  discount  of  10  per  cent  will  be  allowed  for  payment 
of  bills  within  ten  days  from  their  date. 

NOTE.  —  Consumers  in  Schedule  C  whose  consumption  is  less  then  200,000 
cu.  ft.  shall  revert  to  Schedule  B.  In  the  event  it  becomes  necessary  for  the 
company  to  cut  off  the  supply  of  gas  to  consumers  in  Schedule  C,  the  largest 
consumers  will  be  cut  off  first.  The  same  will  apply  should  it  be  necessary 
to  cut  off  consumers  in  Schedule  B. 


290  PUBLIC  UTILITY  RATES 

In  consideration  of  the  rates  named  in  Schedules  B  and  C  and  having 
regard  for  the  obligations  of  its  franchise,  the  company  reserves  the  right 
to  discontinue  service  without  notice  to  customers  using  gas  under  these 
schedules,  provided  it  should  become  necessary  to  do  this  in  order  to  main- 
tarn  a  proper  supply  of  gas  in  any  district  to  Schedule  A  consumers. 

In  the  event  it  becomes  necessary  to  shut  off  the  supply  of  gas  to  consumers 
using  gas  under  Schedules  B  and  C,  those  using  gas  under  Schedule  C  will  be 
shut  off  first  and  those  under  Schedule  B  next,  and  as  between  individual 
consumers  the  company  will  select  those,  the  shutting  off  of  which  will  do 
the  most  to  improve  the  service  to  its  domestic  or  Schedule  A  consumers. 

The  rates  named  in  Schedules  B  and  C  are  quoted  solely  for  the  purpose  of 
disposing  of  surplus  gas.  No  extension  or  enlargement  of  mains  will  be  made 
to  serve  customers  under  these  schedules.  The  consumer  expressly  waives 
any  claim  for  loss  or  damage  on  account  of  discontinuance  or  interruption 
of  service  and  waives  any  claim  for  priority  of  service  over  any  other  con- 
sumer. 

New  Baltimore  Schedules.  —  The  greatest  departure  in  gas- 
utility  practice  of  recent  years  undoubtedly  is  the  gas-rate  system 
placed  in  effect  February  1916  by  the  Consolidated  Gas  Electric 
Light  and  Power  Co.,  Baltimore,  Md.  To  encourage  the  use 
of  gas  as  domestic  fuel  a  net  rate  of  35^  per  1000  cu.  ft.  was 
made  for  consumption  over  the  old  normal  —  a  lower  price 
than  for  what  manufactured  gas  had  ever  been  known  to  be 
sold.  For  these  consumers,  the  primary  rate  was  75 $  net  — 
for  up  to  1000  cu.  ft.  per  month  per  room  for  domestic  use 
(counting  all  the  main  rooms  in  a  house  less  two,  and  with  a 
minimum  primary  amount  of  4000  cu.  ft.)  and  for  up  to  150  hours 
use  of  maximum  rate  of  consumption  in  commercial  service. 
To  make  the  scheme  applicable  without  the  delay  incident  to 
examining  and  rating  each  domestic-customer's  premises,  the 
customer's  maximum  monthly  draft  during  1915,  provided  it 
exceeded  4000  cu.  ft.,  was  taken  as  the  primary  amount.  The 
gas  schedules  of  the  Baltimore  company  can  be  set  forth  in 
general  as  in  the  following  four  paragraphs.  The  particularly 
interesting  schedules,  "C"  and  "D"  are  also  presented  in  their 
official  form.  Schedule  "K,"  covering  industrial  service  is 
notable  as  showing  a  concrete  case  of  a  demand  (and  customer) 
plus  an  output  factor. 

SCHEDULE  C  —  YEARLY  CONTRACT  GENERAL  GAS  RATES. 

For  convenience,  called  the  Commercial  Schedule.  75  cents  net  per  1,000 
cubic  feet,  with  an  excess  rate  of  35  cents  net  for  over  150  hours'  use  of  the 
demand  per  month.  Primary  Rating  reduced  one-half  for  bakers,  using  gas 


RATE  PROBLEMS  OF  GAS  UTILITIES  291 

chiefly  between  the  hours  of  8  P.M.  and  6  A.M.     Minimum  Primary  Rating 

4,000  cubic  feet  per  month. 

SCHEDULE   D  —  RATES   FOR   DOMESTIC   SERVICE. 

75  cents  net  per  1,000  cubic  feet,  with  an  excess  rate  of  35  cents  net  for 
consumption  (a)  over  last  year's  maximum  month  for  present  customers,  or 
(b)  over  a  scheduled  room  basis  for  new  customers;  with  the  right  of  the 
(a)  customers  to  apply  the  (b)  basis  upon  request.  Minimum  Primary 
Rating  4,000  cubic  feet  per  month. 
SCHEDULE  E  —  NON-CONTRACT  GENERAL  GAS  RATES. 

75  cents  net  per  1,000  cubic  feet  per  month;  for  50,000  cubic  feet  per  month 
or  over,  70  cents;   for  100,000  cubic  feet  or  over  per  monthj  65  cents. 
SCHEDULE  K  —  INDUSTRIAL  GAS  RATES,   GENERAL  SERVICE. 

Three-year  contract;  Fixed  Costs  $204.00  per  year  for  300  cubic  feet  of 
demand,  $48.00  per  100  cubic  feet  for  excess  demand;  Running  Costs,  35 
cents  net  per  1,000  cubic  feet  up  to  1,000,000  cubic  feet  per  month,  30  cents 
for  excess. 

SCHEDULE  C  — YEARLY  CONTRACT  GENERAL  GAS  RATES. 

—  Gas  for  any  purpose  will  be  sold  under  this  Schedule,  upon  application,  to 
any  Customer  who  has  signed  an  agreement  for  yearly  gas  service,  em- 
bodying the  usual  terms  and  conditions  of  the  Company  now  or  hereafter  in 
force. 

PRIMARY  RATE:  Eighty-five  cents  gross  per  thousand  cubic  feet,  seventy- 
five  cents  net  when  bills  are  paid  on  or  before  the  last  discount  day. 

SECONDARY  RATE:  Forty-five  cents  gross  per  thousand  cubic  feet,  thirty- 
five  cents  net  when  bills  are  paid  on  or  before  the  last  discount  day. 

This  rate  will  apply  to  all  gas  used  per  month  in  excess  of  the  amount  here- 
inafter specified  as  the  Primary  Rating,  and  only  to  such  excess.  The  Pri- 
mary Rating  is  the  number  of  cubic  feet  per  month  which  must  be  used  at  the 
Primary  Rate  before  the  Secondary.  Rate  applies. 

The  Primary  Rating  under  this  Schedule  will  be  placed  at  the  number  of 
thousands  of  cubic  feet  corresponding  most  nearly  to  one  hundred  and  fifty 
times  the  Customer's  Demand,  the  Demand  being  defined  as  the  maximum 
hourly  rate  of  consumption  in  cubic  feet.  This  is  equivalent  to  one  hundred 
and  fifty  hours'  use  of  the  Demand  per  month,  figured  to  the  nearest  number 
of  even  thousands  of  cubic  feet.  The  Primary  Rating  shall  remain  fixed,  and 
a  fixed  element  in  billing,  so  long  as  the  Customer's  conditions  of  maximum 
rate  of  use  do  not  increase,  but  shall  in  no  event  be  taken  at  less  than  4,000 
cubic  feet  per  month  (Three  Dollars  net). 

DEMAND:  The  demand  is  the  maximum  rate  of  use  by  the  Customer  and 
is  defined  as  the  greatest  number  of  cubic  feet  used  in  any  one  hour.  It  may 
be  specified  in  the  contract  and  estimated  by  the  Company  from  the  burner 
rating  or  otherwise,  and  may  be  redetermined  from  time  to  time  according  to 
the  Customer's  normal  use  of  gas.  The  Demand  shall  not  be  substantially 
decreased  during  any  twelve-month  term  of  the  contract,  but  shall  be  increased 
in  accordance  with  and  for  all  billing  after  any  increase  in  maximum  use 
which  may  from  time  to  time  occur.  The  Primary  Rating  will  be  changed 
accordingly.  Upon  extraordinary  occasions  for  a  certain  limited  period  the 


292  PUBLIC  UTILITY  RATES 

Company  may,  at  its  option,  give  permission  to  exceed  the  determined  maxi- 
mum rate  of  use  by  a  stated  amount  without  increasing  the  estimated  Demand 
upon  which  the  Primary  Rating  is  based. 

METERS:  Not  over  two  meters  will  be  furnished  by  the  Company  at  its 
expense  at  any  one  contract  location  under  this  schedule,  unless  installed 
for  the  Company's  convenience.  Additional  meters  will  be  furnished  at  a 
rental  of  $2.50  per  month  each,  for  meters  on  which  demands  are  determined, 
and  at  a  rental  of  $1.00  per  month  each  for  sub-meters.  Where  more  than 
one  meter  is  installed  for  the  convenience  of  the  Customer,  the  consumption 
shall  be  billed  separately  for  each  meter  and  the  Demand  and  the  Primary 
Rating  determined  separately  for  each  meter. 

SCHEDULE  "C"  NIGHT  SERVICE:  For  installations  in  which  gas  is  chiefly 
used  for  such  processes  as  require  its  consumption  between  the  hours  of 
8  P.M.  and  6  A.M.,  such  as  the  processes  used  by  bakers,  the  specified 
Demand,  or  the  Demand  upon  which  the  Primary  Rating  is  based,  may  be 
taken  as  one-half  of  the  maximum  demand  occurring  between  above  said  hours, 
provided  that  the  demand  upon  which  the  Primary  Rating  is  based  shall  not 
be  less  than  the  maximum  demand  during  any  other  hour  and  that  the  Pri- 
mary Rating  shall  not  be  reduced  below  4000  cubic  feet  per  month. 

COMBINATION  DOMESTIC  AND  GENERAL  SERVICE:  For  a  Customer  using 
domestic  service  on  the  same  meter  with  service  for  other  uses  than  are  pro- 
vided for  under  the  Domestic  Schedule  D,  the  Primary  Rating  will  be  taken 
as  the  sum  of  the  Domestic  Primary  Rating  under  Schedule  D  and  of  the  Pri- 
mary Rating  under  this  Schedule  C. 

TERMINATION:  When  the  Customer  has  used  the  Company's  service  at 
the  contract  premises  for  over  one  year,  the  contract  may  be  terminated  at 
any  time  after  ten  days'  written  notice  from  either  party  to  the  other.  Upon 
proper  notice  of  removal,  the  contract  will  be  terminated. 

SCHEDULE  D  — RATES  FOR  DOMESTIC  SERVICE.  —  Gas  for 
domestic  use  will  be  sold  under  this  Schedule  to  any  Domestic  Customer  of 
this  Company  who  has  signed  an  agreement  for  the  service  under  the  usual 
terms  and  conditions  now  or  hereafter  in  force.  This  Schedule  will  become 
effective  on  all  consumption  after  the  regular  meter  readings  taken  in  Feb- 
ruary, 1916. 

PRIMARY  RATE:  85  cents  gross  per  1000  cubic  feet,  75  cents  net  when 
bills  are  paid  on  or  before  the  last  discount  day. 

SECONDARY  RATE:  When  the  Customer's  use  of  gas  is  in  excess  of  the 
amount  hereinafter  specified  under  Primary  Rating,  the  additional  consump- 
tion so  used  will  be  at  the  rate  of  45  cents  gross  per  1000  cubic  feet,  35  cents  net 
when  bills  are  paid  on  or  before  the  last  discount  day.  This  Secondary  Rate 
will  be  applied  only  where  the  said  additional  service  is  supplied  through  the 
regular  house  meter  furnished  for  all  consumption,  and  only  to  the  consump- 
tion in  excess  of  the  estimated  ordinary  use  by  the  Customer,  which  ordinary 
use  will  be  designated  the  Primary  Rating. 

PRIMARY  RATING  :  The  Primary  Rating  for  new  Customers  and  for  present 
Customers  at  new  locations  will  be  determined  as  follows,  it  being  under- 
stood that  all  ordinary  rooms,  such  as  living  rooms,  dining-rooms,  kitchens, 
bedrooms,  servants'  quarters,  bathrooms  and  laundries  will  be  included  in 


RATE  PROBLEMS  OF  GAS  UTILITIES  293 

the  list  of  rooms,  but  that  cellars,  closets,  pantries  and  storerooms  will  not 

be  included: 

PRIVATE  HOUSES 

of    6  rooms  or  less  4,000  cubic  feet  per  month. 

of    7  "                  5,000 

of    8  "                  6,000         "                 " 

of    9  "                  7,000          "                 " 

of  10  "                  8,000          " 

of  11  "                  9,000 

of  12  "  10,000 

with  an  excess  of  1000  cubic  feet  per  room  for  each  room  over  12. 

Individual  apartments  will  be  rated  on  the  same  basis  as  private  houses. 
Boarding  houses  and  rooming  houses  shall  be  taken  at  1000  cubic  feet  per  room 
per  month. 

In  putting  this  Schedule  into  general  effect  for  all  Domestic  Customers  on 
the  lines  of  the  Company  at  the  time  of  the  said  February  meter  readings, 
the  Primary  Rating  will  be  taken  in  each  case  as  the  number  of  thousands  of 
cubic  feet  per  month  that  is  nearest  to  the  maximum  consumption  by  the 
Customer  in  any  month  during  the  preceding  twelve  months  at  the  same 
premises,  and  such  maximum  consumption  will  control  the  determination  of 
the  Primary  Rating  for  all  such  Customers  so  long  as  they  may  continue 
at  their  present  premises.  Where  the  Customer  has  occupied  premises  for 
less  than  eight  months,  the  Company  shall  have  the  right  to  determine  the 
Primary  Rating  in  accordance  with  the  Schedule  herein.  The  Primary 
Rating  shall  in  no  event  be  taken  at  less  than  4000  cubic  feet  per  month  for 
any  of  the  classes  of  Customers  specified  herein,  and  where  the  Customer's 
maximum  consumption  has  been  less  than  4000  cubic  feet  per  month,  his 
Primary  Rating  shall  be  taken  at  4000  cubic  feet  and  the  Secondary  Rate 
shall  apply  for  all  consumption  in  excess  thereof. 

How  Baltimore  Schedules  were  Made.  —  The  new  schedules 
were  the  result  of  two  years  study  of  the  possibilities  in  com- 
peting with  other  fuels,  particularly  where  large  quantities 
were  used.  A  study  of  operating  characteristics  for  years  back 
showed  prior  to  1908  a  load  factor  of  23  to  29%  and  since  then 
improvement  to  37%  (peak-hour  day,  1914)  and  48%  (maxi- 
mum-output day,  1914).  A  typical  daily  load  curve  (1910-1914) 
showed  a  consumption  rate  of  some  500,000  cubic  feet  per  day 
from  6  A.M.  to  3  P.M.,  a  sharp  peak  rise  to  1,500,000  cubic  feet  per 
day  at  6  P.M.  and  a  steady  decline  to  150,000  cubic  feet  per 
day  at  12  A.M.  and  a  gradual  recovery. 

All  customers  using  over  50,000  cubic  feet  per  month  were  clas- 
sified according  to  use  —  apartment  houses,  boarding-houses, 
churches,  bowling  alleys,  bakeries,  meat  shops,  and  their  demand 
estimated  by  hourly  readings  during  heavy-load  periods  in  test 


294  PUBLIC  UTILITY  RATES 

cases.  Recording  devices  were  attached  to  meter  dials  and  gear- 
ing to  give  a  graphic  record.  The  individual  load  factors  varied 
from  6  to  100%.  The  average  for  the  classes  varied  from  9% 
(shoe  manufacturers  and  office  buildings)  to  39%  (newspapers). 
Lunch  rooms  showed  the  best  combination  of  high  load  factor 
(29%)  and  large  number  of  customers. 

The  various  expenses  were  grouped  into  customer,  demand 
and  output  classes.  Prior  to  making  tentative  schedules,  the 
total  customer  cost  was  divided  by  the  number  of  customers  to 
give  the  unit  cost  per  customer  per  year;  the  total  demand  costs 
divided  by  the  aggregate  customers'  demands  gave  the  unit 
cost  per  thousand  cubic  feet  per  hour  demand;  the  output 
costs  were  divided  by  the  sales.  Several  special  modifications 
were  made:  (1)  An  allowance  was  added  to  the  customer  unit 
cost  to  cover  cost  of  finding  demand  and  applying  this  to  rates; 
the  customer  and  demand  charge  were  merged  for  simplicity; 
(2)  the  output  charge  contained  a  sum  for  covering  fixed  operat- 
ing cost  of  some  special  customers  —  including  meter  reading  and 
billing;  (3)  ample  margin  was  left  to  cover  contingencies  and 
to  avoid  embarrassment;  (4)  large  spread  was  left  between  the 
rate  curves  for  large  and  small  customers  to  induce  larger  use; 
it  was  aimed  to  have  the  slope  of  each  rate  curve  steep  enough 
so  that  individual  customers  could  see  the  advantages  of  im- 
proving their  load. 

Results  in  Baltimore.  —  During  the  first  month  after  the 
35^  secondary  rate  went  into  effect,  it  benefited  about  6000 
domestic  customers,  out  of  a  total  of  some  130,000  consumers 
of  all  sorts.  In  practically  all  cases  there  was  no  installation 
of  new  consuming  equipment  at  this  early  period,  but  the  in- 
stallations rose  very  rapidly  toward  summer. 

The  gas  distributed  by  the  Baltimore  Company  is  a  mixed 
coke-oven  and  carburetted-water  gas.  The  coke-oven  gas  is 
purchased  from  the  Maryland  Steel  Co.,  at  Sparrows  Point, 
Md.,  and  is  piped  Yl\  miles.  The  quantity  available  varied  in 
1914  from  zero  to  4,800,000  cubic  feet.  The  carburetted  water  gas 
is  added  to  make  up  the  daily  demand  and  the  quality  is  adjusted 
so  as  to  keep  the  final  distributed  product  of  20  c.p.  The  coke- 
oven  gas  has  varied  from  7  to  14  c.p.  value  and  from  517  to  606 
B.t.u.  thermal  value.  It  is  purchased  on  a  candle-power  basis 
and  in  1914  cost  per  candle-power  the  same  as  carburetted  water 


RATE  PROBLEMS  OF  GAS  UTILITIES  295 

gas.  The  last  had  a  thermal  value  of  570  B.t.u.  per  cubic  foot. 
The  average  thermal  value  of  the  mixed  gas  distributed  was 
reported  in  1916  as  591.2  B.t.u. 

The  average  net  holder  cost  of  the  gas  made  by  this  company 
in  1913-1914  —  gross  cost  for  labor'  and  materials  —  was  27^ 
per  1000  cubic  feet,  not  including  interest,  depreciation  and 
other  fixed  charges.  After  the  addition  of  charges  to  cover 
distribution,  metering,  new  business,  general  expense,  taxes, 
etc.,  the  average  cost  was  52^  at  the  burner. 

Gas  Rates  in  American  Cities.  —  The  gas  rates  in  certain 
American  cities  are  assembled  with  other  pertinent  data  in  ap- 
pended tables  (taken  from  published  compilations  made  by  J.  C. 
Dickerman  for  the  Utilities  Bureau) .  All  such  tables  show  inher- 
ent limitations  of  usefulness,  in  spite  of  their  interesting  nature. 
No  matter  how  careful  the  citation  of  variable  affecting  conditions, 
the  ability  to  transfer  information  from  one  situation  to  another 
is  extremely  restricted,  and  possible  general  deductions  are  few. 
For  example,  in  the  following  table,  Boston  is  shown  as  having 
80^  gas,  while  it  is  generally  reported  that  the  price  was  put  down 
(under  a  dividing  scale)  below  cost  so  that  the  holding  concern 
might  distribute  some  real-estate  profits  used  to  swell  the  surplus 
fund. 

These  tables  lead  one  to  the  view  that  the  differences  in  cost  of 
gas  diminish  with  increased  sales,  being  more  pronounced  among 
concerns  with  sales  of  less  than  30,000,000  cubic  feet  per  year. 
Differences  in  manufacturing  cost  due  to  different  costs  of  fuel  are 
evident  but  apparently  are  not  of  first  importance.  Taxes  are  a 
heavier  burden  on  the  smaller  companies  than  the  larger  ones. 
The  operating  costs  seem  to  have  held  up  above  $1  per  1000  cubic 
feet  where  less  than  20,000,000  cubic  feet  per  year  was  made  by  a 
works;  these  costs  seemed  to  have  dropped  down  to  80^  for  works 
producing  about  50,000,000  cubic  feet,  to  7Q£  for  100,000,000  cubic 
feet  and  to  50^  for  500,000,000  cubic  feet. 


296 


PUBLIC  UTILITY  RATES 


COST  OF  ARTIFICIAL  ILLUMINATING  GAS  IN  AMERICAN  CITIES 

Compiled  by  J.  C.  Dickerman  from  published  reports  and  printed  in 

"  Utilities  Magazine"  (Utilities  Bureau,  Philadelphia), 

July  and  November,  1915. 

FOR  NINETEEN  LARGER  CITIES 


- 

Annual  Sales 

Oper- 

ating 

Taxes 

Gas 

City 

Years 
(Inclu- 
sive) 

Cost 
per 
Thou- 

per 
Thou- 
sand 

Net  Selling 
Price  U 

Approxi- 
mate 

per 
Meter 
or 

Kind  and 
Quality  tt 

sand 

Sold 

Total 

Con- 

Sold§§ 

(1000 
Cu.  Ft.) 

sumer 
(Cu. 

Ft.) 

Milwaukee,  Wis.* 

1909-1913 

$0.3184 

SO  0658 

$0.75-0.50s.s. 

2,820,000 

36,000 

98% 

630  B.t.u. 

coal 

Boston,  Mass.f.  . 

1910-1914 

0.4074 

0.0727 

0.80 

5,600,000 

32,600 

Mixed, 

650  B.t.u. 

51% 

water 

Baltimore,  Md.f. 

1911-1914 

0.4225 

0.0655 

0.90-0.80 

3,540,000 

32,000 

Mixed, 

20  c.p. 

25% 

New  York,  N.Y. 

1909-1912 

0.4227 

0.0576 

0.80 

26,040,000 

32,000 

coal 
Mixed, 

23  c  p. 

mostly 

water 

Racine,  Wis.§.    . 

1G09-1913 

0.4322 

0.0603 

1.00-0.  60  s.s. 

238,000 

22,000 

Coal 

612  B.t.u.' 

Lynn,  Mass....  . 

1910-1914 

0.4464 

0.0595 

0.75-0.50  s.s. 

745,000 

26,700 

Mixed, 

Over  10 

55% 

c.p. 

water 

Minneapolis, 

1911-1914 

0.4480 

0.0508 

0.85-0.80 

2,213,000 

33,650 

Mixed, 

18  c.p. 

Minn. 

65% 

water 

Philadelphia, 

1910-1914 

0.4500 

0.0025 

1.00 

18Q.OOO 

27,000 

Coal 

15  c.p. 

Pa.  l| 

Hartford,  Conn. 

1912-1914 

0.4511 

0.0294 

0.90-0.75 

657,000 

26,700 

Mostly 

19  c.p. 

water 

Brooklyn,  N.  Y. 

1909-1912 

0.4516 

0.0449 

0.80 

11,930,000 

29,800 

Water 

23  c.p. 

New  Bedford, 

1910-1914 

0.4558 

0.0804 

0.80 

480,000 

25,500 

60% 

18  c.p. 

Mass. 

water 

Washington, 

1911-1914 

0.4560 

0.0635 

0.85 

2,500,000 

42,100 

Mixed 

23  c.p. 

B.C. 

95% 

water 

Rochester,  N.  Y. 

1909-1913 

0.4683 

0  0648 

0.95 

1,300,000 

24,000 

80% 

20  c.p. 

water 

New   Haven, 

1912-1914 

0.4790 

0.0601 

0.90 

1,230,000 

26,400 

Mixed, 

19  c.p. 

Conn. 

60% 

water 

Worcester,  Mass. 

1910-1914 

0.4902 

0.0664 

0  75 

780,000 

30,500 

Mixed, 

18.2  c.p. 

40% 

water 

Fall  River,  Mass. 

1910-1914 

0.4913 

0.0720 

0.80 

560,000 

24,200 

Water 

20  c.p. 

Bridgeport,  Conn. 

1912-1914 

0.5009 

0.0605 

.     $1.00 

545,000 

22,500 

Water 

20  c.p. 

Syracuse,   N.  Y. 

1909-1913 

0.5508 

0.0738 

0.95-0.63  s.s. 

650,000 

21,500 

Mixed 

18  c.p. 

Westchester  and 

1909-1913 

0.6215 

0.0626 

1  50-1  00 

1,480,000 

25,700 

Water 

23  c.p. 

suburbs  of  New 

York  City** 

*  This  company  purchases  very  large  portions  of  its  gas  from  by-product  coke  ovens  and  sells 
coke  at  high  price. 

t  This  company  purchases  about  50%  of  its  supply  from  coke  ovens,  and  sells  about  14%  to 
other  companies. 

|  Purchases  coke-oven  gas  and  manufactures  water-gas. 

§  Coke  sold  to  more  than  pay  for  all  gas  coal  used. 

I)  This  is  not  the  big  city  plant,  but  a  small  independent  company  operating  with  vertical 
retorts.  The  cost  given  is  a  maximum.  Taxes  estimated  indirectly,  but  are  practically  nothing 
for  city  and  state  purposes. 

**  This  company  operates  in  23  towns  and  villages  under  suburban  conditions  near  New  York 
City. 

tt  Calorific  or  candle-power  values  used. 

Ji  S.S.  =  Sliding  Scale.    [Not  the  British  dividing  scale.] 

§§  Exclusive  of  taxes  and  depreciation. 


RATE  PROBLEMS  OF  GAS  UTILITIES 


297 


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CHAPTER  XV 
RATE    PROBLEMS   OF   ELECTRICITY    SUPPLY    WORKS 

Nearly  all  Utility  Problems  Encountered.  —  The  most  in- 
clusive generalized  discussions  of  rate-making  problems  —  par- 
ticularly as  regards  most  such  matters  as  bearing  of  cost  of 
service,  peak  loads,  non-peak  business,  reserved  equipment  for 
maximum  demand,  classified  customers,  diversity  factors,  effect 
of  apportioning  retirances  and  other  true  expense  items,  minimum 
charges,  lack  of  investment  records  and  need  of  appraisals, 
franchise  questions,  land  and  water  rights,  discarded  equip- 
ment, reasonable  return,  promoting  initiative,  discrimination, 
etc.,  —  seem  to  apply  more  completely  and  with  fewer  special 
exceptions  to  electric-supply  undertakings  than  to  the  other 
utilities  like  water-works  and  gas  supplies,  or  railroads  and 
electric  railways.  Illustrations  and  applications  of  general  prin- 
ciples therefore  have  been  more  frequently  taken  from  electric 
utilities  than  the  others  throughout  this  whole  work.  This 
has  rendered  unnecessary  a  lengthy  presentation  of  electric 
rate-making  problems.  To  preserve  the  balance  of  treat- 
ment and  for  ready  information,  brief  review  has  been  made  in 
the  following  paragraphs  of  the  history,  growth  and  technol- 
ogy of  the  industry,  and  a  few  special  problems  have  been 
mentioned. 

History  of  the  Electric  Central  Station.  —  The  very  early 
history  of  electricity  supply  is  of  course  the  history  of  the  de- 
velopment of  magneto-electric  machinery,  for  there  was  no  pros- 
pect of  commercial  service  before  the  conversion  of  mechanical 
energy  into  electrical  became  practical  and  cheap.  The  first 
step  was  the  discovery  of  magneto-electric  induction,  by  Henry  in 
1831  and  independently  by  Faraday  about  the  same  time.  Primi- 
tive generators  were  made  shortly  thereafter  but  the  modern 
machine  was  not  possible  until  the  principle  was  established  of 
using  self-supplied  electro-magnets  in  place  of  weak  permanent 
magnets  to  produce  the  necessary  magnetic  fields  in  which  wire 
coils  were  to  be  rotated.  This  development  was  independently 

300 


RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     301 

given  by  Siemens  and  Wheatstone  in  1867.  A  good  arma- 
ture had  been  produced  in  1860  by  Pacinotti  but  it  was  more  of 
a  laboratory  device  than  an  engineering  machine,  and  it  was 
reinvented  on  the  latter  plane  by  Gramme  in  1870.  The  Sie- 
mens I-shuttle  and  Gramme  ring  armature  were  combined  into 
the  drum  armature  in  1873  by  Hefner- Alteneck. 

Probably  because  of  the  lack  of  a  cheap  and  convenient  source 
of  electric  current,  the  development  of  a  practical  electric  lamp 
had  lagged.  Crude  low-resistance  incandescent  electric  lamps 
had  been  made,  for  instance  by  Starr  and  King  in  1845;  and 
arc  lamps  had  been  built  by  Davy  in  1812,  Jablochkoff  in  1876, 
and  Serrin  in  1857.  But  there  had  been  no  attempt  at  a  whole 
system  of  lighting  —  prime  movers,  generators,  distribution 
lines,  and  lamps  —  until  1878.  Indeed  it  is  probable  that  gen- 
eral mechanical  and  electrical  engineering  progress  up  to  then 
had  not  been  great  enough  to  permit  it.  Finally  at  about  the 
same  time  three  systems  were  brought  out:  (1)  that  of  Jab- 
lochkoff in  France,  using  alternating  current  and  arc  "  candles," 
or  two  thin  vertical  carbon  pencils  separated  by  a  strip  of  clay; 
(2)  that  of  Brush  using  a  special  direct  constant-current  gen- 
erator and  automatic  arc  lamps  connected  in  series,  (3)  that 
of  Edison  using  an  improved  constant-potential  direct-current 
generator  supplying  high-resistance  carbon-filament  vacuum-bulb 
lamps  connected  in  parallel. 

Secrets  of  Early  Success.  —  Probably  the  secrets  of  Edison's 
success  lay  in  the  use  of  a  high-resistance  (about  100  ohms) 
carbon  filament  where  others  had  always  attempted  to  use  low 
resistances  (say  10  ohms).  This  gave  him  a  system  of  lamps 
connected  in  parallel  instead  of  the  old  constant-current  series- 
circuit  idea  to  which  others  clung.  He  secured  at  once  the 
great  advantages  of  subdivision  of  light  units  and  non-interfering 
control  of  each  lamp. 

The  economy  of  distribution  secured  by  Edison  with  his 
arrangement  of  a  supply  network  connected  to  the  generating 
station  by  feeders  was  also  novel  —  others  having  proceeded  from 
pipe-line  experiences  to  develop  only  mains  and  branches,  all 
increasing  in  size  from  the  customer  to  the  station.  In  further 
search  for  economy  he  developed  the  three-wire  double-voltage 
distribution,  but  this  was  independently  conceived  by  Hop- 
kinson  in  England  and  Siemens  in  Germany.  Some  60  to  70% 


302  PUBLIC  UTILITY  RATES 

of  the  cost  of  copper  was  saved.  The  Edison  system  aroused 
a  veritable  furor  of  discussion  both  favorable  and  adverse. 
Gas  company  stocks  dropped,  and  the  newspapers  and  maga- 
zines were  full  of  arguments,  pro  and  con. 

The  Brush  system  achieved  immediate  success  for  street 
lighting,  though  it  was  of  very  limited  use  for  interior  illumi- 
nation. The  generator,  regulator  and  lamps  were  each  good  and 
serviceable,  and  were  well  combined.  The  Brush  system  soon  had 
a  strong  competitor  in  the  Thomson  and  Houston  arc  system  which 
was  marked  by  a  somewhat  better  generator  and  regulator. 
The  Edison  system  was  a  good  complement  to  the  Brush  and 
Thomson-Houston;  it  was,  if  anything,  even  better  commer- 
cialized. The  Edison  distribution  system  soon  had  to  meet  com- 
petition with  the  Stanley-Westinghouse  development  of  the 
Goulard-Gibbs  alternating-current  transformer;  and  the  Sawyer- 
Mann,  Swan  and  Fox  incandescent  lamps  came  on  the  market. 

In  all  these  developments,  plus  the  high-speed  steam  engine, 
the  multipole  generator,  the  steam  turbine  and  the  so-called 
Francis  hydraulic  turbine,  rests  the  technology  of  the  modern 
central-station  industry.  The  direct-current  generating  and 
distributing  system  of  Edison  have  been  restricted  to  short  dis- 
tances and  congested  districts  but  so  well  conceived  were  the 
details  of  his  system  that  many  persist  today  unchanged,  al- 
though the  lamps  may  be  supplied  with  alternating-current.  The 
Brush  and  Thomson-Houston  generators  and  arc  lamps  have 
about  completely  disappeared  but  they  paved  the  way  for  the 
later  enclosed  and  luminous  arcs  on  existing  series  street  circuits. 

First  Central  Station.  —  As  a  result  of  Edison's  experimental 
work  in  the  development  of  the  multiple  lamp,  underground 
network  and  feeders,  and  three-wire  system,  plans  were  made 
for  a  station  in  lower  Manhattan,  New  York  City.  A  terri- 
tory 2000  feet  square  was  canvassed  to  find  the  number  of  lamps, 
and  the  number  and  size  of  motors  probably  required.  The  plant 
had  a  capacity  of  2000  horsepower,  using  water-tube  boilers,  direct- 
connected  high-speed  (350  r.p.m.)  generators,  and  a  steel  skel- 
eton-frame support.  Edison  and  his  assistants,  after  designing 
the  station  and  system  down  to  ultimate  details,  had  to  organize 
and  manage  shops  for  the  manufacture  of  the  equipment.  But 
capitalists  hesitated  to  embark,  though  the  new  station  paid 
financially  before  its  technical  success  was  admitted.  Construe- 


RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     303 

tion  had  to  be  cheapened  and  adapted  to  smaller  municipalities 
—  and  in  that  form  stations  were  soon  built  in  Massachusetts, 
Pennsylvania,  and  Ohio.  The  Pearl  Street  Station,  New  York 
City,  started  Sept.  5,  1882,  with  5500  lamps.  In  14  months 
it  had  12,732  lamps.  Soon  a  station  was  built  at  26th  St.  and 
another  at  39th  St.  Then  one  rose  in  Boston  and  one  in  Brook- 
lyn. In  1887  the  first  Chicago  Station  was  started.  An  im- 
portant technical  contribution  was  made  by  the  Berlin  (Ger- 
many) Electricity  Works  about  1889  when  it  used  vertical 
marine  engines  and  multipolar  generators. 

There  were,  in  1886,  47  Edison  illuminating  companies, 
capitalized  at  $5,000,000;  47  stations  were  in  operation  and 
10  in  construction.  The  57  stations  supplied  160,000  lamps. 
Series  street-lighting  systems  were  devised  for  incandescent 
lamps  and  installed  in  Lockport,  N.  Y.,  Portland,  Me.,  Law- 
rence, Mass.,  Jacksonville,  Fla.,  Brookline,  Mass.,  Denver,  Col., 
and  Lachine  Canal,  P.  Q.  Stationary  power  service  was  sup- 
plied. By  1890,  60  cities  had  stations.  The  growth  of  the 
central-station  industry  in  recent  years  is  shown  by  the  accom- 
panying table  prepared  by  the  United  States  Census  Bureau. 

The  early  rates  (1890)  were  from  $150  to  $75  per  horsepower-year, 
for  24-hour  power;  the  average  cost  then  to  Edison  stations  was 
from  $25  to  $40  (not  including  fixed  charges  and  profit).  An 
ampere-hour  electrolytic  meter  was  early  developed,  but  flat 
rates  were  common.  For  example  in  Hazelton,  Pa.,  \\i  per 
hour  per  10-candle-power  lamp  was  charged;  in  Tamaqua,  75^ 
down  to  lOjzf  per  10-candle-power  lamp  per  month  was  fixed 
depending  on  the  number  of  lamps.  The  early  stations  were 
calculated  to  yield  10  to  20%  on  the  investment.  This  return 
included  the  then  unstudied  item  of  depreciation,  simple  interest, 
and  all  the  rewards  for  capital. 

Uses  for  Electricity.  —  The  main  uses  for  electric  energy  are : 
(1)  general  distribution  for  light,  power,  and  heat,  (2)  electric 
railways,  (3)  electrochemistry.  The  first  of  these  services  was 
the  original  field  of  the  central-station  industry  but  railway 
supply  has  been  found  an  attractive  load  for  the  electric  com- 
panies because  it  adds  diversity.  Electrochemistry  offers  re- 
markable possibilities  for  non-peak  and  off-peak  service,  but 
comparatively  little  benefit  has  been  secured  by  the  great  num- 
ber of  central  stations.  The  ability  of  a  central  station  to  ac- 


304 


PUBLIC  UTILITY  RATES 


GROWTH  OP  COMMERCIAL  AND  MUNICIPAL  CENTRAL  ELECTRIC  STATIONS  * 


1912 

1907 

1902 

Per  Cent 
Increase 
1902-1912 

Number  of  stations  f 

5,221 
3,659 
1,562 
$302,115,599 

$286,980,858 
$15,134,741 

$234,419,478 

79,335 

7,528,648 

7,844 
4,946,532 

2,933 
2,471,081 

1,116 
111,035 

5,134,689 
11,532,963,006 

505,395 
76,507,142 

435,473 
4,130,619 

4,714 
3,462 
1,252 
$175,642,338 

$169,614,691 
$6,027,647 

$134,196,911 

47,632 
4,098,188 

8,054 
2,693,273 

2,481 
1,349,087 

463 

55,828 

2,709,225 
5,862,276,737 

If  562,795 
1f  41,876,332 

167,184 
1,649,026 

3,620 
2,805 
815 
$85,700,605 

$84,186,605 
$1,514,000 

$68,081,375 

30,326 
1,845,048 

6,295 
1,394,395 

1,390 
438,472 

165 
12,181 

1,212,235 
2,507,051,115 

385,698 
18,194,044 

101,064 
438,005 

44.2 

30.4 
91.7 
252.5 

240.9 
899.7 

244.3 

161.6 
308.0 

24.6 
254.7 

111.0 
463.6 

576.4 
811.5 

323.6 
360.0 

31.0 

320.5 

330.9 
843.1 

Commercial  . 

Municipal  

Total  income  f  

Light,  heat,  and  power, 
including  free  service  . 
All  other  sources  

Total  expenses,  including 
salaries  and  wages  §  . 
Total  number  of  persons 
employed  

Total  horsepower.  .  .    . 

Steam  engines  and  steam 
turbines:  || 
Number  

Horsepower  

Water  wheels: 
Number  

Horsepower  

Gas  and  oil  engines: 
Number  

Horsepower  

Kilowatt  capacity  of  dy- 
namos .... 

Output    of    stations     in 
kilowatt  hours  

Estimated  No.  of  lamps 
wired  for  service; 
Arc  

Incandescent  and  other 
varieties  

Stationary  motors  served  : 
Number  

Horsepower  capacity.  .  . 

*  From  Bulletin  124,  U.  S.  Bureau  of  the  Census. 

t  The  term  "  station,"  as  here  used,  may  represent  a  single  electric  station  or  a  number  of 
stations  operated  under  the  same  ownership. 

t  Exclusive  of  $36,500,030  in  1912,  $20,093,302  in  1907,  and  $7,703,574  in  1902  reported  by  street- 
and  electric-railway  companies  as  income  from  sale  of  electric  current  for  light  or  power,  or  from 
sale  of  current  to  other  public-service  corporations. 

§  In  addition  to  salaries  and  wages,  includes  the  cost  of  supplies  and  materials  used  for  ordi- 
nary repairs  and  replacement,  advertising,  fuel,  mechanical  power,  electrical  energy  purchased, 
taxes,  and  all  other  expenses  incident  to  operation  and  maintenance,  and  for  1912  charges  for 
depreciation  and  charges  for  sinking  fund. 

II  Includes  auxiliary  engines. 

U  Includes  for  purposes  of  comparisons  7082  arc  and  267,997  incandescent  lamps  reported  by 
the  electric  companies  to  light  their  own  properties.  Lamps  used  for  such  service  were  included 
in  the  total  number  reported  in  1912. 


BATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     305 

quire  a  railway  and  electrochemical  load  depends  on  its  ability 
to  make  a  low  price  for  energy,  and  this  means  that  such  custom- 
ers will  carry  comparatively  little  of  the  fixed  charge,  compared 
with  some  other  classes  of  customers. 

The  proportion  between  power  and  lighting  loads  depends  on 
the  town  served;  it  varies  all  the  way  from  that  of  small  cities 
where  practically  all  current  is  used  for  street  and  house  lighting, 
to  the  large  industrial  district  where  most  of  the  power  is  sup- 
plied to  mills  and  factories,  and  only  a  small  domestic-  and 
street-lighting  load  is  carried  in  the  evening. 

The  requirements  on  different  parts  of  a  central-station  sys- 
tem are  somewhat  conflicting.  Power  can  be  used  in  the  great 
majority  of  cases  only  at  low  potentials  —  say  up  to  600  volts. 
Economical  transmission  requires  high  potential.  For  elec- 
trolytic processes  direct-current  is  imperative;  and  it  is  de- 
sirable for  street  railways.  For  furnaces  alternating  current 
is  preferable. 

Technology  of  Supply.  —  The  fundamental  feature  of  a  modern 
electricity-supply  system  is  of  course  the  generating  plant. 
This  is  commonly  a  steam  power  station  located  as  close  to  the 
load  center  of  the  area  served  as  is  compatible  with  a  cheap 
supply  of  coal  and  water.  In  it  then  are  the  familiar  boilers, 
engines  or  turbines,  generators,  switchboards,  transformers,  etc. 
In  a  few  cases  the  stations  have  been  located  in  coal  fields  close 
to  the  cheapest  fuel  supplies  and  transmitting  energy  over  con- 
siderable distances  to  markets.  In  a  number  of  instances,  while 
coal  remains  the  fuel,  gas  producers  have  been  substituted  for 
the  boilers,  and  internal-combustion  motors  for  the  steam  en- 
gines or  turbines.  The  possibility  of  converting  the  energy 
of  falling  water  to  electricity  has  brought  the  hydro-electric 
station  into  importance,  wherever  the  economy  of  having  to 
purchase  no  fuel  is  not  offset  by  the  increased  interest  charges 
on  extra  investment  and  the  added  losses  from  long-distance 
transmission. 

The  smaller  central  stations  may  generate  direct-current  to 
be  distributed  over  a  restricted  area.  The  larger  plants  have  to 
employ  alternating  current  on  account  of  the  ease  of  utilizing 
high  voltages  which  enable  economical  transmission.  Where  a 
district  to  be  served  is  considerable  in  extent,  a  number  of  sub- 
stations are  used,  each  situated  near  some  important  sub-center 


306  PUBLIC  UTILITY  RATES 

of  the  load.  Generally  the  high  voltage  is  stepped  down  in  a 
substation  to  one  which  is  safer  for  the  local  distribution  on 
radiating  lines.  For  special  services,  where  the  frequency  of 
the  alternating  current  or  the  current  itself  is  unsuitable,  the 
substation  may  house  rotating  machinery  for  producing  a  differ- 
ent frequency  or  for  direct  current. 

At  the  larger  customers'  premises,  or  in  the  vicinity  of  a  group 
of  smaller  customers,  the  current  —  if  it  be  alternating  —  is 
again  reduced  to  about  110  or  220  volts,  at  which  potential  it 
enters  the  customers'  wires.  In  America  110  volts  at  the  lamp 
is  standard  practice,  and  abroad  220.  There  is  a  saving  in  cost 
of  wires  and  in  line-voltage  drop  by  using  220  volts,  but  it  is 
more  than  overcome  for  lighting  installations  by  the  10-15% 
inherently  lower  efficiency  of  220-  over  110-volt  lamps.  In 
specific  cities  the  voltage  runs  from  100  to  130;  this  was  early 
brought  about  by  the  impossibility  of  making  each  vacuum- 
tube  carbon-filament  lamp  of  a  certain  rigidly  fixed  voltage  for 
economical  service. 

In  large  cities  with  underground  distribution,  the  alternating  cur- 
rent is  at  a  disadvantage  compared  with  direct,  for  the  inductive 
voltage  drop  of  the  former  is  additive  to  the  resistance  loss  with 
direct  current,  and  since  a  multiplicity  of  comparatively  small 
conductors  becomes  better  than  one  or  a  few  very  large  ones. 

In  the  early  days  of  alternating-current  distribution,  a  small 
transformer  was  placed  for  each  customer.  It  was  soon  realized 
that  this  was  undesirable  for  each  transformer  had  to  be  able 
to  carry  the  occasional  maximum  so  the  devices  were  lightly 
loaded  most  of  the  time.  But  the  full  magnetic  losses  continued 
all  day,  and  commonly  the  power  drawn  and  paid  for  by  the 
customer  was  only  35%  of  that  furnished  in  a  day's  time  to  the 
transformer.  By  having  one  transformer  serving  a  group  of 
customers,  a  more  efficient  loading  was  secured,  making  use  of 
the  diversity  of  customers'  demand  so  that  the  revenue  power 
jumped  to  70%  of  the  total  furnished. 

Besides  the  transformer  losses  there  are  also  line  loss  and  leak- 
age, meter  loss  and  error, .and  possible  unaccounted  losses.  At 
full  load  all  these  may  be  15  to  18%  of  the  full-load  capacity, 
resulting  in  a  maximum-hour  capacity  of  82  to  85%.  The  all- 
day  losses,  however,  may  easily  be  33%  of  the  total  supply, 
resulting  in  a  system  efficiency  of  only  66%. 


RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     307 

Development  of  Lighting.  —  Incandescent-filament  lamps  can 
be  made  to  run  on  either  constant-voltage  or  constant-current 
circuits,  but  the  electric  arc  is  essentially  unstable  without  a 
constant-current  supply,  for  the  voltage  drop  decreases  as  the 
current  increases  and  vice  versa.  Arc  lamps  are  commonly 
designed  for  constant-current  circuits,  though  by  placing  a 
steadying  resistance  in  series  with  the  arc  it  can  be  run  on  a 
constant-voltage  circuit  —  at  reduced  efficiency.  The  arc-light 
generator  was  necessarily  a  small  machine,  since  100  to  150  lamps 
in  series  gave  as  high  potential  as  safe  to  use  on  such  circuits 
—  4000  to  10,000  volts.  It  has  been  made  obsolete  by  the 
development  of  the  movable-secondary  constant-current,  or 
"  tub,"  transformer  —  used  alone  for  alternating-current  arcs 
or  with  mercury-arc  rectifiers  for  direct-current  lamps.  This 
of  course  is  supplied  from  constant-potential  alternating-current 
generators  of  ordinary  types. 

In  the  old  simple  carbon-arc  lamp  practically  all  the  light 
came  from  the  incandescent  tips  of  the  pencils.  A  modern 
development  is  to  incorporate  in  the  carbon  electrodes  materials 
which  are  luminous  in  the  arc,  stream,  such  as  calcium  and 
titanium.  This  gives  increased  efficiency  of  light  production. 
A  mercury  electrode  is  used  with  the  arc  in  a  vacuum  tube. 
An  earlier  improvement  of  the  open  arc  consisted  of  using  a 
loose  enclosing  globe  which  retarded  the  consumption  of  car- 
bon and  increased  the  hours  of  burning.  The  latest  form  of 
direct-current  arc  substitutes  an  electrode  of  iron  and  titanium 
oxides,  resulting  in  a  highly  efficient,  brilliant  arc  stream  and 
long  hours  of  burning.  A  luminous  arc  for  alternating  cur- 
rents has  been  developed  using  titanium-carbide  electrodes. 

Edison  in  developing  his  incandescent-filament  lamps  early 
discarded  metals,  but  later  scientific  researches  (1905)  and  gen- 
eral advance  in  metallurgy  made  possible  the  tungsten  filaments 
which  have  all  but  driven  the  carbon  type  out  of  the  market. 
These  have  a  specific  consumption  of  0.5  to  1.5  watts  per  candle 
compared  with  3.1  to  3.5  for  carbon. 

While  miscellaneous  uses  for  central-station  electricity  supply 
have  been  developed  yet  practically  every  central  station  has 
to  supply  lighting  current  so  that  the  great  majority  of  gener- 
ators are  built  for  the  close  regulation  —  slight  voltage  fluctua- 
tion —  required  for  such  service. 


308  PUBLIC  UTILITY  RATES 

Difficulties  of  Continuous  Service.  —  Continuity  of  current 
supply  is  one  matter  of  great  importance  in  the  real  success  of 
an  electric  utility  and  the  satisfaction  of  customers;  yet  it  has 
been  painfully  accomplished  by  the  application  of  great  amount 
of  engineering  study  and  no  small  expenditure  of  money.  The 
lack  of  easy  storage  for  the  electric  current,  the  dependence  on 
rotating  machinery,  the  delay  incident  to  pressing  idle  gener- 
ators into  service,  the  local  destruction  wrought  by  the  concen- 
tration of  energy  at  a  fault,  etc.,  have  conspired  to  make  this 
problem  of  first  magnitude.  One  important  provision  is  ample 
spare  capacity  in  generators,  feeder-lines,  etc.,  and  the  distri- 
bution of  the  fixed  charges  on  these  should  be  carefully  studied. 
In  many  cases  it  will  be  found  inequitable  to  include  these 
wholly  with  other  charges  allocated  upon  peak-customers'  de- 
mand; it  may  be  fair  to  charge  them  in  part  on  output  —  on 
the  grounds  of  an  expense  of  general  maintenance  of  business. 

Importance  of  the  Meter.  —  The  customer's  meter  consti- 
tutes one  of  the  most  important  and  highly  developed  parts 
of  an  electric-supply  system.  Meters  are  almost  universally 
owned,  maintained,  and  read  by  the  utility  company.  They  are 
virtually  light  and  delicate  direct-  or  alternating-current  motors 
with  jewel  bearings;  one  winding  takes  current  proportional  to 
the  line  voltage  and  another  winding  to  the  customer's  current. 
They  are  loaded  with  a  copper  disk  rotating  in  a  magnetic  field 
so  that  the  speed  is  always  proportional  to  the  energy  drawn 
in  the  circuit  of  which  they  are  a  part.  Great  advance  has 
been  made  in  producing  a  low-priced  but  reliable  and  accurate 
watt-hour  meter.  Yet  no  meter  retains  its  accuracy  indefinitely, 
and  occasional  inspection  and  re-test  is  advisable  both  for  the 
company's  and  the  customer's  interest.  The  required  accuracy 
of  electricity  meters  is  commonly  placed  at  3,  4,  or  5%  fast  or 
slow  as  tested.  The  lower  limit  is  fair  for  most  alternating-cur- 
rent meters  but  the  higher  may  have  to  be  allowed  for  direct- 
current  meters.  Under  some  rules  when  a  meter  is  over-fast  a 
rebate  is  ordered  for  the  known  fast  period,  and  the  company 
is  allowed  to  collect  an  added  sum  from  the  consumer  when  the 
meter  is  slower  than  prescribed. 

The  meter  investment  remains  so  large  and  the  annual  cost 
of  maintenance,  reading,  book-keeping,  etc.,  commonly  aggre- 
gate so  much  in  excess  of  $6  per  year  that  the  unit  cost  of 


RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     309 


service  to  very  small  consumers  is  prohibitive.  A  meter  also 
absorbs  12  to  20  kw.-hr.  per  year,  non-revenue  energy.  •  The 
small  customer  has  been  successfully  cultivated  abroad  on 
unmetered  service  with  flat  rates,  and  is  longingly  regarded  in 
America  as  an  aid  to  diversified  use.  A  barrier  to  use  by  small 
consumers  has  been  the  cost  of  interior  wiring  (from  $1  to 
$6  per  outlet,  depending  on  the  building  and  whether  wires 
are  exposed  or  concealed) .  An  inexpensive  simplified  system 
of  exposed  wiring  (the  "  Concentric  ")  has  recently  been  intro- 
duced in  America  to  reduce  cost  of  such  work. 

Maximum  Demands  of  Electric  Customers.  —  Much  study 
has  been  made  of  the  probable  maximum  demands  of  various 
PER  CENT  OF  CONNECTED  CAPACITY  THAT  is  ACTIVE  LOAD 


Class 

Ripon* 

Madison  t 

Wisconsin 
Companies 
Using 
Demand 
Indicator  t 

Chi- 
cago t 

Residences,  flats  and  rooming  houses  .  . 

40 

60 

0.3  kilowatt  connected  capacity  

60 

90 

0.5        "                "                "        . 

60 

64 

1.0        "                "                "        

60  and  33 

48 

2.0        "                "                "       

60  and  33 

46 

Public  buildings  

40 

55 

33 

Churches                    

55 

55 

56-85 

Schools  

55 

55 

37-52 

Stores,  retail  

75 

70 

40-100 

66 

Stores,  wholesale  

70 

Offices,  banks  

75 

70 

57-87 

72 

Theatres  ....                         

75 

70 

49-89 

Depots  

75 

70 

75-95 

Hotels  

60 

55 

28 

29 

Libraries  

60 

55 

Stables  

60 

55 

52-58 

60 

Factories  

55 

55 

53-56 

Saloons  

75 

70 

62-92 

Clubs  

75 

55 

28 

29 

Electric  signs     

100 

100 

86 

Street  lamps  

100 

Motor  installations: 
single,  under  10  h.p  

90 

several,  aggregating  10  h.p  

80 

10-20  h.p.      .                                ... 

70 

20-50  h.p. 

60 

50-100  h.p  

55 

over  100  h.p  

50 

Shops  

55 

58 

Machine  shops  

37-54 

Blacksmith  shops  

66 

*  Ripon  v.  Ripon  Light  and  Water  Co.,  1910;  5  Wis.  R.  R.  Comm.  1. 

*  Re  Madison  Gas  and  Electric  Co.,  1911;  7  Wis.  R.  R.  Comm.  152,  167. 

+  E.  W.  Lloyd,  "  Load  Factors,"  Nat.  El.  Light  Assoc.,  1909;  G.  A.  McKenzie  and  B.  F. 
McGuire,  "  Significance  of  Statistics,"  Nat.  El.  Light  Assoc.,  1910. 


310 


PUBLIC   UTILITY  RATES 


electricity  consumers,  for  the  need  of  properly  distributing  the 
heavy  fixed  charges,  locked  up  in  plant  reserved  for  maximum 
demand,  has  been  felt  more  in  this  utility  field  than  in  others. 
It  is  desired  to  find  probable  maximum  demand  without  ex- 
pense and  complication  of  a  demand  meter  in  regular  use.  The 
work  of  the  Wisconsin  Commission  is  notable  in  this  field.  The 
preceding  table  gives  some  of  this  body's  data,  and  a  few  from 
Chicago  studies. 

Diversity  of  Central  Station  Loads.  —  An  electric  plant  is  a 
true  service-type  of  utility  (as  defined  on  page  15);  there  is  re- 
quired generating  and  distributing  capacity  sufficient  to  satisfy 
the  maximum  demand  of  the  year,  and  this  is  in  some  part 
idle  all  during  the  rest  of  the  year.  In  winter  the  load  curve 
of  a  typical  winter  day  for  a  small  utility  rises  slowly  from  10% 
output  at  2  A.M.  to  25%  at  2  P.M.,  then  more  sharply  to  100% 
at  5  or  6  P.M.  and  then  steadily  drops  off  to  10%  at  2  A.M. 
again.  For  a  summer  day  the  first  rise  is  from  10%  at  2  A.M. 
to  25%  at  7  P.M.,  and  an  80%  peak  comes  at  8  to  9.  On  a  large 
system,  say  of  100,000  kilowatts  capacity,  supplying  light,  sta- 
tionary and  traction  power,  there  is  typically  a  low  15%  period 
from  2  to  5  A.M.,  a  rise  to  75%  output  at  9  A.M.,  a  65%  period 
from  10  A.M.  to  4  P.M.,  a  100%  peak  at  6  P.M.,  and  a  steady 
decline  thereafter. 

The  general  phenomena  of  time-diversity  of  utility  demand  and 
its  effect  on  investment  has  already  been  discussed  (page  32)  and 
illustrated  by  reference  to  electricity-supply  works.  It  is  neces- 
sary only  to  append  here  for  illustration  some  experience  data  *  on 
"  diversity  factors"  (ratio  of  sum  of  maximum  demands  of  sub- 
divisions to  actual  experienced  maximum  demand  on  the  system 
or  main  division  thereof).  The  following  applies  to  Chicago, 
but  is  undoubtedly  typical  of  the  larger  American  cities. 

CHICAGO  LIGHTING  SYSTEM,  DIVERSITY  FACTORS 


Residence 
Lighting 

Commercial 
Lighting 

Retail 
Power 

Large 
Users 

Meter  to  transformer  

3.35 

1.46 

1.44 

1.0 

Transformer  to  feeder  

1.3 

1.3 

1.35 

1.15 

Feeders  to  substation  

1.15 

1.15 

1.15 

1.15 

Substation  to  generating  station 
Meter  to  generating  station  

1.1 
5.5 

1.1 

2.4 

1.1 

2.46 

11 

1.45 

*  From  "Application  of  Diversity  Factor,"  by  H.  B.  Gear;    Proceedings, 
National  Electric  Light  Assoc.,  June  1915. 


RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     311 

Residence  Tariffs.  —  The  problem  of  securing  a  good  rate 
schedule  for  residence-supply  customers  is  particularly  difficult, 
compared  with  industrial-supply  customers.  The  latter  are  more 
apt  to  have  enough  technical  knowledge  to  understand  a  two- 
or  three-part  charge  and  their  long  hours  of  use  generally  result 
in  satisfactory  low  cost  of  energy.  The  former  require  a  very 
simple  tariff  for  them  to  understand,  while  their  service  is  in 
peak-load  hours  and  of  short  duration  so  that  their  cost  of  en- 
ergy is  apt  to  be  comparatively  high  —  although  they  cannot 
readily  see  how.  It  is  universally  desirable  that  the  residence 
consumed  should  be  well  satisfied  and  that  the  tariff  should  be 
so  framed  as  to  stimulate  longer  hours  of  use.  A  simple  classi- 
fication into  size  classes,  with  various  unit  prices  for  each,  or- 
dinarily is  not  sufficient  to  attain  all  the  desired  ends.  Some 
of  the  simpler  differential  schemes  that  have  been  employed  to 
make  the  charges  approximate  true  costs  are  noted  below. 

"  Norwich "  Tariff.  —  The  two-  or  three-part  rate  with  a 
Wright  (or  substitute)  maximum-demand  indicator  has  not  been 
well  received  by  the  ordinary  residence  consumer  and  where 
tried  has  added  to  the  investment,  accounting  and  adjustment 
expenses  of  lighting  service.  One  of  the  attempts  to  sugar-coat 
the  pill,  named  after  Norwich,  England,  where  it  was  early 
tried,  was  to  charge  the  consumer  a  fixed  sum  equal  to  such  a 
percentage  of  his  tax  "  rateable  valuation  "  as  would  return  on  the 
average,  his  probable  demand  and  customer  cost,  the  plausible 
argument  being  used  that  the  peak  demand  for  current  de- 
pended on  the  size  of  and  investment  in  the  dwelling.  This  has 
been  found  to  work  fairly  well  in  a  community  where  all  the 
residences  are  rated  on  the  same  basis.  But,  in  most  cases, 
position  in  the  town  and  in  the  block  affect  the  renting  value  of 
the  dwelling  house,  and  so  does  the  extensiveness  of  the  grounds, 
while  neither  condition  appreciably  affects  lighting.  There  is 
apt  to  be,  for  America,  undue  discrimination.  The  percentage 
figure  used  has  commonly  been  of  the  order  of  10  to  15%  of  the 
"rateable  values."  To  it  of  course  has  been  added  an  energy 
charge,  say  1  to  3^  per  kilowatt-hour,  for  whatever  quantity  the 
watt-hour  meter  recorded.  The  British  "  Point  Five  Association  " 
has  successfully  exploited  this  scheme  with  a  lj£  (0.5d)  energy  charge. 

"  Telephone  "  Tariff.  —  The  obvious  shortcomings  of  the 
"  Norwich  "  tariff  have  led  to  other  schemes,  prominent  among 


312  PUBLIC  UTILITY  RATES 

which  is  one  called  in  England  the  "Telephone"  tariff  be- 
cause of  its  similarity  to  systems  of  charging  for  telephone 
service.  The  customers  were  assessed  an  advance  charge 
intended  to  cover  the  demand  and  customer  costs,  plus  a  per- 
unit  energy  charge  in  accordance  with  the  watt-hour  meter 
reading. 

The  best  example  of  this  probably  was  at  St.  Marylebone, 
England,*  where  70%  of  the  capacity  of  the  lamps  (not  count- 
ing mere  "  convenience "  lamps  in  storerooms,  cellars,  etc.,  or 
decorative  sockets)  was  charged  at  about  $70  per  kilowatt  per 
year  as  the  primary  factor.  The  secondary  charge  was  2£  per 
kilowatt-hour. 

In  connection  with  such  a  tariff,  the  customer  contracted  to 
use  only  electricity  for  lighting,  and  the  low  secondary  unit 
charge  stimulated  miscellaneous  services  and  longer  hours  of 
lighting.  Maximum-demand  indicators  were  used  for  accumu-> 
lating  experience  about  the  demand  factors  of  residence  in- 
stallations. These  showed  that  the  small  dwellings  had  a  de- 
mand equal  to  about  80%  of  the  total  installed  lamps  while 
the  largest  residences  showed  only  33%;  the  elimination  of  deco- 
rative and  convenience  lamps  made  70%  fair  for  all.  It  was 
necessary,  however,  in  considering  decorative  lighting  to  rule 
that  there  should  be  a  service  lighting  of  1  watt  per  square  foot 
of  floor  area. 

Wisconsin  System.  —  The  earlier  Wisconsin  studies  f  of  the 
various  classes  of  customers  showed  notable  uniformity  in  the 
use  of  their  installed  capacity,  the  proportion  of  "  active "  to 
"  connected  "  load  running  from  40  to  50%  for  residences,  50 
to  80%  for  stores,  etc.,  as  has  already  been  stated  in  detail. 
It  has  been  considered  that  60%  of  the  first  500  watts  connected 
capacity  in  a  residence  should  be  considered  as  active  and  33% 
of  all  over  that.  A  typical  schedule  called  for  12^  per  kilowatt- 
hour  for  the  first  30  hours'  use  of  each  kilowatt  of  active  load, 
6^  per  kilowatt-hour  for  the  next  60  hours  use,  and  2£  per 
kilowatt-hour  for  all  hours  use  beyond  that.  Making  up  a  cus- 
tomer's bill  may  be  shown  by  an  illustration: 

*  See  the  paper  "Residence  Tariffs,"  by  A.  H.  Seabrook,  before  the  Brit- 
ish Institution  of  Electrical  Engineers,  Dec.  14,  1911. 

t  "Rates  For  Electric  Plants,"  by  Halford  Erickson,  Ohio  Electrical 
Assoc.,  July  1914. 


RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     313 

Monthly  meter  reading 100  kilowatt-hours 

Connected  load 1100  watts 

Rated  active  load 700  watts 

30  hr.  use  of  active  load, 

21  kilowatt-hour  @  12£. . . .     $2. 52 
60  hr.  use, 

42  kilowatt-hour  @    G£ $2. 52 

Balance  of  use, 

37  kilowatt-hour  @    2^. ...     $0.74 
Total $5.78 

The  Wisconsin  scheme,  it  is  seen,  modifies  the  strictly  logical 
use-of-demand  plan  (which  would  make  the  secondary  charges 
proportional  to  only  operating  expenses  —  the  fixed  and  cus- 
tomer charge  being  paid  by  the  first  period  of  use  of  the  cus- 
tomers' lamps) .  The  break  is  eased  more  gradually,  apparently 
for  commercial  reasons. 

The  Detroit  System.  —  A  scheme  was  worked  out  about  1908 
by  the  Detroit  Edison  Co.,  based  on  the  number  of  rooms  in 
the  residence.  A  net  charge  of  12.6^  per  kilowatt-hour  is  im- 
posed for  up  to  2  kilowatt-hours  per  month  for  the  principal 
rooms;  only  3.6^  per  kilowatt-hour  is  charged  for  all  in  excess. 
Lavatories,  baths,  kitchens,  storerooms,  closets,  stairways  and 
halls,  pantries,  porches,  vestibules,  servants'  rooms  and  bedrooms 
up  to  three  are  not  counted.  Once  the  number  of  units  to  be 
charged  at  the  primary  rates  is  fixed,  it  is  subject  to  change 
only  by  structural  alteration  of  the  house.  Unless  a  house  has 
altogether  less  than  three  rooms,  the  net  minimum  charge  is 
$0.76  —  six  units  at  the  primary  rate.  In  the  experience  of  the 
Detroit  company,  the  residence  rate  in  1916  averaged  about  5.8^ 
per  kilowatt-hour  and  tended  to  fall. 

For  commercial  lighting  installations  this  company  uses  the 
maximum-demand  indicator  in  connection  with  the  watt-hour 
meter.  The  gross  charge  is  10^  per  kilowatt-hour  for  the  first 
30  hours'  use  per  month  of  the  maximum  demand,  plus  4j£ 
per  kilowatt-hour  for  the  next  120  hours  use,  and  plus  2^  per 
kilowatt-hour  for  the  remainder.  There  is  a  discount  of  10% 
for  prompt  payment  on  bills  of  less  than  $50  per  month,  15% 
on  $50  to  $100,  20%  on  $100  to  $200,  and  25%  on  $200  and 
over.  Lighting  rates  include  free  renewals  of  tungsten  lamps 


314  PUBLIC  UTILITY  RATES 

in  40-,  60-  and  100-watt  sizes,  and  reduced  prices  on  larger 
lamps. 

Alternating-current  power  is  sold  in  Detroit  on  a  two-part 
rate  —  $4.50  gross  per  month  per  kilowatt  of  demand  up  to 
20  kilowatts,  and  $3  for  over  that  figure,  plus  lj£  per  kilowatt- 
hour  for  all  current.  Direct-current  power  is  sold  at  $4.50  per 
kilowatt  of  demand  for  up  to  100  kilowatts  and  $3  for  the  excess, 
plus  1  £  per  kilowatt-hour  for  the  first  250  hours  use  of  maximum 
demand  per  month  and  0.6^  per  unit  for  the  excess.  Power  is 
also  sold  at  4j£  per  kilowatt-hour  for  those  who  require  short- 
term  contracts.  Where  such  power  is  incidental  to  lighting, 
as  in  department  stores,  it  may  be  recorded  on  the  lighting  meter 
(but  then  is  not  shown  on  the  demand  indicator)  and  all  current 
in  excess  of  the  first  30  hours  use  of  the  lighting  demand  is 
charged  at  4j£  per  kilowatt-hour.  Both  customer  and  company 
benefit  by  this  last  arrangement;  the  customer  reduces  his 
lighting  bill  and  the  company  saves  the  cost  of  a  separate  meter 
and  separate  account. 

Canadian  Cities  System.  —  Several  Canadian  cities  and  towns 
taking  current  from  the  Ontario  Hydro-Electric  Commission 
have  adopted  two-part  rate  schemes  recommended  by  the 
Commission.  The  residence  lighting  schedule  resembles  that 
in  use  in  Detroit,  substituting  square  feet  of  floor  area  for  num- 
ber of  rooms.  There  is  typically  (City  of  London  in  1915)  a 
primary  charge  (neglecting  10%  prompt-payment  discount)  of 
3j£  per  100  square  feet  of  floor  space  plus  2j£  per  kilowatt- 
hour  for  all  consumption  up  to  4  kilowatt-hours  per  month 
per  1000  square  feet  of  floor  area  for  the  first  1000  square  feet, 
and  up  to  3  kilowatt-hours  per  month  for  eacn  1000  square 
feet  additional;  plus  \i  per  kilowatt-hour  for  all  additional. 
The  floor  area  is  taken  as  the  product  of  outside  dimensions, 
excluding  bay  windows,  porches,  etc.,  multiplied  by  the  number 
of  floors.  Thus  basements,  verandas,  unfinished  attics,  etc.,  are 
not  included. 

The  foregoing  is  for  domestic  service;  for  commercial, lighting, 
the  charge  is  5j£  per  kilowatt-hour  for  the  first  30  hours  use  of 
load,  plus  2^  per  kilowatt-hour  for  the  next  70  hours  use,  plus 
0.5^  per  kilowatt-hour  for  all  additional  consumption.  For 
24-hour  unrestricted  power  there  is  a  service  charge  of  $1  per 
horsepower  per  month,  plus  2f  £  per  kilowatt-hour  for  the  first 


RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     315 

50  hours  use  of  load,  plus  1.7^  per  kilowatt-hour  for  the  next 
50  hours  use  and  0.2^  per  kilowatt-hour  for  all  additional  en- 
ergy. Over  this  is  10%  off  for  prompt  payment. 

The  Kapp  Rate  System.  —  Any  review  of  electric  rates  would 
be  incomplete  without  at  least  passing  mention  of  the  Kapp  or 
two-rate  system  of  metering.  As  first  planned,  it  was  decided 
what  weight  off-peak  energy  should  have  compared  with  peak, 
and  then  the  meter  was  rigged  to  record  full  quantities  at  peak 
hours  and  some  fraction  of  actual  delivery  at  off-peak  hours. 
The  meter  reading,  of  course,  was  multiplied,  by  some  price  for 
peak-load  current.  The  name  is  now  often  stretched  some- 
what to  cover  separate  metering  of  peak  and  off-peak  con- 
sumption, there  being  different  prices  for  the  two. 

Comparison  of  Rates  in  American  Cities.  —  There  is  a  marked 
lack  of  published  tabulations  of  American  electricity  rates,  in  con- 
trast with  the  tables  cited  herein  for  gas  and  water  utilities.  The 
U.  S.  Census  reports,  the  central-station  directories  and  even  the 
various  state-commission  utility-statistics  reports  show  this  lack. 
This  seems  to  be  because  no  tabulation  fairly  discloses  operations 
and  rates  without  special  study  of  each  concern  and  conversion  to 
some  common  basis  of  comparison  —  which  conversion  itself,  how- 
ever, prevents  seeing  the  form  in  which  rates  are  promulgated. 
This  need  of  conversion  in  turn  arises  from  the  many  classes  and 
qualities  of  service  given,  the  spread  of  supply  systems  to  several 
unlike  communities,  etc.  Therefore  attempts  to  tabulate  rates  for 
typical  cities  have  been  abandoned  here  and  in  place  of  such 
figures  the  preceding  notes  on  important  types  of  schedules  have 
been  substituted. 

Isolated  Plants  and  Breakdown  Service.  —  The  thorn  in  the 
flesh  of  central-station  sales  stimulators  and  contract  agents 
is  the  so-called  "  isolated  plant"  in  the  larger  cities.  There  are 
those  who  claim,  on  the  one  hand,  that  in  the  majority  of  cases 
a  large  building  will  save  money  to  generate  its  own  current  for 
lighting,  elevators  and  tenants'  power  —  especially  if  exhaust 
steam  can  be  used  for  winter  heating.  There  are,  on  the  other 
hand,  those  who  claim  that  if  all  the  true  costs,  rental,  losses, 
etc.,  are  included  in  the  accounts,  the  isolated-plant  expenses 
will  mount  up  so  rapidly  that  central-station  service  must  be 
cheaper.  The  truth,  as  common  in  controversies,  probably  lies 
between  the  two  extremes.  Surely  there  are  cases  where  the 


316  PUBLIC  UTILITY  RATES 

private  interior  plant  can  be  so  favored  as  to  conspire  with  the 
handicap  of  expensive  transmission  and  distribution  from  the 
outside  plant  to  make  self-service  the  more  economical.  Ob- 
viously there  are  plants  where  insufficient  economies  are  possi- 
ble to  come  down  to  the  cost  of  outside  current.  Into  which 
class  a  given  project  might  fall  cannot  be  settled  off-hand; 
the  determination  requires  careful  engineering  study  and  use 
of  good  judgment. 

Any  isolated  plant  is  of  course  less  certain  as  to  continuity  of 
supply  than  a  large  system  with  perhaps  several  prime  sources 
of  energy.  On  this  account  so-called  breakdown  service  has 
been  furnished  at  times  and  indeed  can  be  required  on  pay- 
ment of  proper  costs.  Such  service  means  peak-load  capacity 
set  aside  more  or  less  in  proportion  to  the  possible  demand 
of  all  such  customers;  little  or  no  current  is  drawn.  The  rate 
which  is  fair  gives  the  central  station  a  return  on  the  capacity 
held  in  reserve  and  a  little  for  special  inspection,  regular  cus- 
tomer charges,  and,  at  a  low  rate,  for  what  current  had  been 
used. 

Charges  for  Street  Lighting.  —  Rates  for  street  and  park 
lighting  are  commonly  on  a  flat  or  a  lump-sum  basis,  and  this 
is  logical  as  the  number  of  lamps,  power  requirement  and  hours  of* 
use  can  be  accurately  ascertained  in  advance.  Street  lighting 
results  in  long  hours  use  of  the  special  generating  machinery  and 
distributing  lines  so  that  the  unit  price  for  energy  is  fairly  low; 
however  it  is  a  peak-load  service  and  the  unit  price  in  a  given 
locality  cannot  ordinarily  come  down  as  low  as  for  some  in- 
dustrial-power services.  The  cost  of  maintenance  of  arc-lamp 
systems  is  high  on  account  of  the  necessity  of  continual  cleaning 
and  trimming.  The  introduction  of  high-candle-power  tungsten- 
filament  incandescent  lamps,  having  a  specific  consumption 
(0.5  watt  per  candle)  about  as  low  as  the  arc,  has  eliminated  most 
of  the  inspection  and  trimming  expense.  For  example  in  New 
York  City  between  Nov.  1,  1914,  and  Jan.  1,  1916,  15,000  of  the 
300-  and  400-watt  tungsten  lamps  were  substituted  for  arcs,  and 
50,000  of  the  200-watt  tungstens  for  various  electric,  gas  and 
naphtha  lamps. 

A  novel  indeterminate-term  contract  for  street  lighting  was 
made  possible  for  the  smaller  cities  of  Wisconsin  by  an  act  of 
the  state  legislature  in  1915.  Under  this  plan  the  lighting  rate 


RATE  PROBLEMS  OF  ELECTRICITY  SUPPLY  WORKS     317 

would  depend  upon  the  fixed  charges  on  equipment,  both  special 
and  joint,  and  upon  the  direct  and  joint  operating  expenses. 
Should  the  contract  be  terminated,  the  municipality  would  take 
over  the  special  lighting  equipment  at  the  difference  between 
cost  (Jess  scrap  value)  and  the  aggregate  repaid  retirance.* 

Charges  for  Ornamental  Street  Lighting.  —  One  of  the  most 
conspicuous  of  recent  movements  in  municipal  street  lighting  has 
been  the  development  of  large-powered  ornamental  systems  for 
the  business  districts,  making  what  have  been  popularly  termed 
"white  ways."  Such  street  lighting  was  first  exploited  by  asso- 
ciated retail  merchants  to  make  the  local  business  streets  more 
attractive  after  working  hours  of  prospective  customers.  But 
the  effect  was  so  popularly  appreciated  that  it  came  to  be  re- 
garded by  municipal  authorities  as  a  civic  improvement. 

Installations  of  such  systems  have  been  financed  in  various 
ways,  and  the  annual  expenses  have  been  covered  as  variously. 
In  the  older  cases,  some  local  organization,  like  a  Chamber  of 
Commerce,  has  raised  a  special  fund  to  pay  for  the  initial  instal- 
lation and  has  provided  the  annual  revenue  required  for  electric 
current  and  maintenance.  Contracts  for  the  standards,  globes, 
lamps  and  circuits  (generally  underground)  in  some  cases  have 
been  let  to  the  local  central  station,  as  well  as  (separately)  for  the 
maintenance  and  current.  Sometimes  the  central  station  has 
made  an  annual  figure  per  lamp  for  energy  and  care,  and  in  other 
cases  the  total  annual  expense  has  been  subdivided  on  a  frontage 
basis,  the  electric  company  collecting.  A  logical  development  has 
been  to  have  the  municipality  assume  the  annual  burden. 

In  a  few  cases  the  central-station  companies  themselves  own 
the  complete  installation,  the  city,  or  some  local  association,  pay- 
ing a  lump  sum,  or  a  lamp  rate,  that  covers  interest,  retirance, 
care  and  current.  In  other  cases  popular  clamor  (stimulated  a 
little  perhaps)  has  led  the  city  to  pay  both  first  and  annual  cost. 

Whatever  basis  of  financing  is  adopted,  plans  seem  to  be 
growing  in  favor  by  which  the  central-station  company  makes 
a  two-part  lamp  rate,  one  part  covering  interest  on  investment, 
retirance  (if  fixtures  are  company  owned),  and  maintenance,  and 
the  other  part  covering  energy  supplied.  This  plan  facilitates 
various  adjustments  of  hours  of  burning,  etc. 

*  Details  of  such  a  contract  were  described  by  G.  W.  Vanderzee,  before 
the  Wisconsin  Electrical  Association,  March  17,  1916. 


CHAPTER  XVI 
PROBLEMS  OF  TELEPHONE  RATE-MAKING 

Some  Telephone  History.  —  The  history  of  the  development 
of  electric  speech  transmission  as  a  public  service  is  perhaps  the 
most  interesting  story  in  utility  fields.  The  struggles  of  the 
inventor  of  the  telephone,  the  early  indifference  of  capitalists 
and  their  later  scrambles  to  get  inside  the  industry,  the  assaults 
of  the  organized  telegraph  industry,  the  victory  of  a  few  un- 
recognized men  of  limited  means  over  the  many  of  prestige  and 
backing,  the  rapid  multiplication  of  subscribers,  the  spread  of 
long-distance  lines  —  all  these  topics  combine  into  a  tale  of 
absorbing  interest.  The  very  good  showing  of  the  telephone 
monopoly,  conducted  first  as  a  private  enterprise,  when  later 
subjected  to  the  searching  scrutiny  of  public  regulation,  has 
taught  utility  officials  everywhere  the  value  of  conservative 
capitalization  combined  with  liberal  provision  for  maintenance, 
development,  and  retirance. 

The  electric  telephone  was  invented  by  Alexander  Graham  Bell 
in  the  period  of  1874-1876.  The  date  of  his  fundamental  patent 
was  March  7,  1876,  but  the  various  ideas  involved  gradually 
took  shape  in  the  previous  years  while  the  inventor  was  work- 
ing on  a  harmonic  telegraph.  Indeed  Bell's  conception  laid  a 
broad  basis  for  the  whole  modern  development  of  telephony  for 
he  realized  that  a  "  talking  telegraph  "  must  be  forced  to  respond 
to  the  resultant  of  complex  air  impulses  —  sound  waves  —  and 
must  transmit  these  from  place  to  place  as  undulating  or  oscil- 
latory currents  of  high  frequency. 

Bell's  telephone  was  but  the  prototype  of  what  is  today  the 
ear  receiver,  the  sound  reproducer  of  the  spoken  message.  The 
earliest  telephone  outfit  was  merely  a  pair  of  similar  simple  in- 
struments —  in  each  an  iron  disk  vibrating  before  a  polarized 
electromagnet  —  connected  by  a  simple  circuit.  Each  machine 
could  be  worked  as  the  transmitter  or  the  receiver  as  desired. 
But  as  the  possibilities  of  a  telephone  system,  providing  im- 

318 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  319 

mediate  local  intercommunication,  became  more  and  more  ob- 
vious, the  simple  early  apparatus  showed  limitations  due  to  the 
small  amounts  of  energy  in  the  telephonic  currents.  Indeed  in 
the  earliest  days  Bell  had  recognized  the  feeble  nature  of  these 
induced  currents  and  only  by  chance  found  that  unreinforced 
they  were  sufficient  for  practical  operation. 

The  first  change  was  when  the  battery-operated  transmitter 
was  employed  to  send  stronger  impulses  out  on  the  line.  The 
open  road  was  to  cause  changes  in  liquid  or  solid  resistance  by 
the  movement  of  a  transmitter  diaphragm,  and  thus  to  set  up 
stronger  undulatory  currents.  Bell  had  made  this  scheme  one 
of  the  claims  in  his  patent  of  March  7,  1876,  but  it  was  the  ver- 
satile T.  A.  Edison  who  constructed  the  first  practical  trans- 
mitter of  this  sort.  He  had  been  retained  by  the  Western 
Union  Telegraph  Co.,  in  its  endeavor  to  wrest  the  telephone 
business  from  Bell  and  his  associates.  Edison's  patent  speci- 
fications, however,  did  not  disclose  the  true  nature  of  the  ac- 
tions involved  so  that  it  was  possible  for  Emile  Berliner,  1877, 
David  Hughes,  1878,  and  Francis  Blake,  1878,  to  employ  the 
true  principle  and  reach  the  same  goal.  Berliner  and  Blake 
were  employed  by  the  Bell  company  and  gave  the  pioneer  system 
a  device  superior  to  that  of  their  great  competitor.  The  Su- 
preme Court  also  gave  Berliner  priority  over  Edison.  To  the 
latter,  however,  belongs  credit  for  the  use  at  that  time  of  an 
induction  coil  to  step  up  the  potential  of  the  transmitter's  un- 
dulatory battery  currents  for  sending  out  on  the  lines  and  through 
the  receivers. 

The  first  telephones  were  intended  for  connecting  always  the 
same  two  places  —  like  the  customer's  residence  and  factory  - 
although  an  undeveloped  idea  of  widespread  flexible  popular 
intercommunication  by  word  of  mouth  was  disclosed  by  Bell 
in  1877.  This  idea  of  a  possible  telephone  central  station  no 
doubt  was  inspired  by  the  telegraph  intercommunicating  sys- 
tems already  in  use  in  England  (1865),  Philadelphia  (1867), 
and  New  York  (1869).  The  American  District  Telegraph  Co. 
early  used  telephones  as  adjuncts  of  their  messenger  call  lines; 
they  were  introduced  also  by  the  New  York  Law  Telegraph 
system  and  the  Holmes  Boston  Burglar  Alarm  service.  But 
the  first  true  commercial  telephone  exchange  is  commonly  ac- 
counted as  the  Bell  plant  established  in  New  Haven,  in  Jan- 


320  PUBLIC  UTILITY  RATES 

uary,  1878,  though  it  was  quickly  followed  by  similar  ones  in 
Bridgeport,  Meriden,  New  York,  Philadelphia,  and  Chicago. 

The  switchboard  adopted  by  the  Bell  licencees  was  an  adap- 
tation of  the  telegraph  board  with  its  multiplicity  of  cross  strips 
and  connecting  pegs.  The  modern  type  of  switchboard,  which 
even  in  its  crudest  forms  was  a  radical  departure  from  old  tele- 
graph ideas,  strangely  enough  was  developed  by  the  Western 
Electric  Co.,  then  the  manufacturing  associate  of  the  Bell  rival 
-  the  Western  Union  Telegraph  Co. 

Development  of  the  Business.  —  The  business  development 
of  the  telephone  industry  is  as  interesting  to  utility  students 
as  the  technical  history  —  and  even  more  significant.  The 
Bell  system,  while  a  natural  monopoly,  is  unique  among  utilities, 
in  that  the  early  conceptions  of  the  organizers  of  the  business 
seem  to  have  been  broad  enough  so  that  the  same  concern,  or 
group  of  concerns,  has  accommodated  the  growth  of  succeeding 
years  while  keeping  their  procedures  always  economically  sound 
enough  to  weather  strange  and  unforeseen  business  conditions. 
The  Bell  corporation  is  unique  too  in  that  the  present  head  (1916) 
is  the  same  mind  that  gave  the  industry  its  first  adequate 
organization.  The  whole  development  of  this  utility  seems  to 
have  been  toward  the  goal  of  universal  service  —  practically 
accomplished  by  1915  with  generally  satisfied  patrons  in  all 
the  years,  with  constantly  improved  and  extended  lines,  with 
increasing  convenience  and  simplicity  for  the  users,  with  all  the 
tremendous  costs  of  development  constantly  amortized,  with 
the  value  of  final  physical  plant  greater  than  the  issued  stocks 
and  bonds,  with  rates  widely  acceptable,  and  with  usually  pleas- 
ant public  relations  in  spite  of  a  nation-wide  aversion  to  great 
monopolies  and  aggregations  of  capital. 

In  August,  1877,  a  "  Bell  Telephone  Association  "  was  formed 
by  Bell,  Gardner  G.  Hubbard  and  Thomas  Sanders,  who  had 
financed  the  early  experiments,  and  Thomas  A.  Watson,  Bell's 
technical  assistant.  In  1878  the  New  England  Telephone 
Co.,  and  the  Bell  Telephone  Co.,  were  formed  to  use,  licence 
and  manufacture  telephones;  they  were  consolidated  in  1879. 
Theodore  N.  Vail,  the  present  head  of  the  Bell  system  (1916), 
then  the  head  of  the  Federal  Mail  Service  and  an  intimate 
of  Hubbard,  was  secured  as  general  manager  of  the  parent 
company.  His  first  task  was  stiffening  up  the  defense  of  the 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  321 

little  company  against  its  formidable  opponent,  the  Western 
Union.  The  assault  of  the  telegraph  company  on  the  Bell 
patents  was  unsuccessful  and  the  Western  Union  abandoned 
the  field,  the  telephone  company  agreeing  not  to  enter  the  tele- 
graph industry.  Vail  formulated  a  consistent  business  policy 
and  practice  in  the  matter  of  licences  and  contracts,  confining 
agents  to  cities  and  reserving  all  the  toll  lines  and  an  interest 
in  local  concerns  to  the  parent  concern.  He  started  out  for 
standardization  of  equipment.  Apparently  all  his  acts  were 
guided  by  the  great  motive  of  this  organization  —  a  single  uni- 
versal country-wide  system. 

The  financial  means  and  resources  of  Bell,  Hubbard  and 
Sanders  were  early  overtaxed.  Vail  himself  secured  a  few  small 
stockholders  in  his  venture.  Finally  Boston  capitalists  were 
interested  and  W.  H.  Forbes  a  man  of  much  local  influence 
became  President  of  the  company.  After  the  Western  Union 
agreement  was  made,  in  1880,  the  business  was  reorganized 
as  the  American  Bell  Telephone  Co.,  with  $6,000,000  capital. 
About  this  time  Bell,  Sanders,  Hubbard,  and  Watson  retired 
from  active  participation  in  the  company's  affairs  —  apparently 
wealthy  and  not  attracted  by  the  prospective  magnitude  of  the 
concern.  On  March  1,  1880,  there  were  138  exchanges  with 
about  30,400  stations  (complete  sets  of  talking  instruments). 
On  March  1,  1881,  there  were  408  exchanges  with  some  66,300 
stations,  including  10,440  taken  over  from  the  Western  Union. 
By  1889  there  were  743  main  exchanges  in  this  country  with 
158,700  stations  or  subscribers.  The  status  of  company  then 
is  shown  by  a  few  figures:  127,902  miles  of  wire  on  poles,  9458 
miles  of  wire  on  buildings,  8009  miles  under  water;  6182  em- 
ployes, and  369,203,705  connections,  or  conversations,  com- 
pleted in  a  year.* 

Long-distance  Service.  —  In  the  first  few  years,  long-distance 
conversation  was  only  on  an  experimental  scale  —  owing  to  the 
more  pressing  matters  of  local  exchanges  and  patent  litigation. 
But  the  commercial  possibilities  were  not  lost  sight  of,  and  only 
the  local  rights  were  contracted  out. 

The  first  commercial  attempt  at  long-distance  conversation 
seems  to  have  been  between  Boston  and  Lowell  in  1879  (ex- 

*  From  a  summary  of  figures  in  American  Bell  Telephone  Co.  reports, 
by  J.  E.  Kingsbury  in  "The  Telephone  and  Telegraph  Exchanges,"  1915. 


322  PUBLIC  UTILITY  RATES 

eluding  the  Boston-Cambridge  and  Boston-Somerville  private 
lines  of  1877).  The  next  jump  was  across  the  45  miles  from 
Boston  to  Providence.  This  was  successful  after  the  circuit  was 
made  all  metallic  —  the  earth  return  abandoned.  In  1884 
Boston  was  connected  with  New  York.  In  1885,  after  the 
Massachusetts  legislature  refused  to  allow  a  larger  capitaliza- 
tion for  the  American  Bell  Telephone  Co.,  the  American  Tele- 
phone and  Telegraph  Co.  was  formed  under  the  New  York 
laws  to  carry  on  the  long-distance  work.  The  lines  spread 
rapidly  from  place  to  place  after  1885  so  that  when  Chicago  and 
New  York  were  connected  (1892)  the  company  had  some  140,000 
miles  of  wire  strung  —  compared  with  the  13,600  miles  in  use 
at  the  time  just  before  Boston  could  talk  to  New  York.  In 
1899  this  new  company,  by  reason  of  its  broader  powers,  ab- 
sorbed the  Bell  Company,  assuming  an  interest  in  all  the  local 
operating  companies,  owning  the  talking  instruments,  handling 
all  inventions,  developments,  patents,  legal  troubles,  and  financ- 
ing. In  1911,  when  New  York  and  Denver  were  connected,  the 
company's  "long-distance"  wires  totaled  1,805,000  miles.  By 
1913,  the  service  was  pushed  to  Salt  Lake  City  and  by  1915  to 
San  Francisco.  This  distance  is  3400  miles.  The  talking  dis- 
tance a  little  later  was  increased  by  connecting  Florida  with  Cali- 
fornia—  4300  miles  of  line.  At  that  time  there  were  2,438,000 
miles  of  wire  in  toll  service. 

By  the  beginning  of  1916,  it  was  possible  to  talk  from  some 
point,  at  least,  in  each  state  of  the  Union  to  some  point  in  every 
other  state.  It  was  possible  to  talk  between  all  the  more  im- 
portant centers  in  the  great  majority  of  the  states.  The  Bell 
system  connects  almost  every  city,  town  and  village  in  the 
country  —  though  a  great  many  of  the  small  places  are  reached 
by  independent  companies  having  only  connection  privileges. 
In  1912  *  the  Bell  system  operated  74.6  per  cent  of  the  total 
mileage  of  wire,  58.3  per  cent  of  total  number  of  telephones  in 
the  country,  and  51.0  per  cent  of  the  exchanges.  Of  the  1916 
more  important  systems  (with  annual  incomes  of  $5000  or  more) 
the  Bell  interests  controlled  only  9.2  per  cent  (or  176),  but  this 
smaller  number  handled  65.5  per  cent  of  the  traffic,  produced 
80.8  per  cent  of  the  income,  possessed  72  per  cent  of  the  assets, 

*  See  "Report  of  U.  S.  Census  Bureau  on  Telephones  and  Telegraphs 
in  1912,"  published  in  1915. 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  323 

'  ^9 i        '*"    i 

and  employed  77.4  per  cent  of  the  persons  engaged.  Bell  com- 
panies operated  then  in  every  state  of  the  Union,  and  the 
independents  in  all  but  Rhode  Island  and  the  District  of  Co- 
lumbia. The  independent  companies  were  strongest  in  South 
Dakota  with  88.1  per  cent  of  the  telephones.  The  Bell  com- 
panies were  strongest  in  New  England  where  they  controlled 
92.7  per  cent  of  the  telephones. 

At  the  beginning  of  the  year  1916,  the  Bell  system  proper 
comprised  5300  exchanges,  16,050,000  miles  of  wire  in  exchange 
lines,  2,450,000  miles  of  wire  in  toll  lines,  6,155,900  subscribers' 
stations.  There  were  in  addition  2,995,321  stations  of  28,306 
connecting  systems.  The  daily  average  of  completed  local  ex- 
change connections  was  about  25,184,000  and  of  toll-line  con- 
nections 819,000.  The  per  cent  of  telephones  in  the  country 
connecting  with  the  Bell  system  had  risen  to  some  65. 

The  present  condition  and  operations  of  the  Bell  system  are 
of  interest,  and  the  following  comparative  figures  are  appended 
from  the -annual  reports  for  1915. 

REVENUE  AND  EXPENSES  OF  BELL  SYSTEM,  1915 
EXCLUDING  DUPLICATIONS  AND  PAYMENTS  BY  ASSOCIATED  COMPANIES 


Stocks,  bonds  and  notes  outstanding  in  hands  of  public    $796,352,584 

Book  value  plant,  tools  and  supplies 896,021,102 

Appraisal  value,  tools  and  supplies 957,021,102 

Gross  revenue. . . . 239,909;649 

Expenses: 

Operation $84,550,665 

Maintenance 31,171,272 

Depreciation 44,888,702 

Taxes 13,117,253 

Total $173,727,892 

Net  revenue 48,086,114 

Deduct  dividends  paid 32,897,065 

Deduct  interest 18,095,643 

Balance  for  surplus $  15, 189,049 


324 


PUBLIC  UTILITY  RATES 


AVERAGE  OPERATING  UNITS  OF  ASSOCIATED  BELL  OPERATING  COMPANIES, 

1895  TO  1915 

COVERING  ALL  THE  EXCHANGES  AND  TOLL  LINES  OF  THE  BELL  TELEPHONE 

SYSTEM  EXCEPT  THE  LONG-DISTANCE  LINES  OF  AMERICAN  TELEPHONE 

AND  TELEGRAPH  CO. 


Average  per  Exchange  Station 

1895 

1900 

1910 

1914 

1915 

Annual  earnings: 
Exchange  service  

$  69.75 

$  44.68 

$  31.28 

$  29.81 

$  29.80 

Toll  service  

11.35 

12.60 

9.47 

8.60 

8.65 

Total  

$  81.10 

$  57.28 

$  40.75 

$  38.41 

$  38.45 

Expenses: 
Operation  

$  29.15 

$  21.63 

$  15.14 

$  15.88 

$  15.61 

Taxes  

2.23 

2.37 

2.00 

2.00 

2.02 

Total  

$  31.38 

$  24.00 

$  17.14 

$  17.88 

$  17.63 

Balance  

49.72 

33.28 

23.61 

20.53 

20.82 

Maintenance  and  depreciation.. 
Net  earnings  

26.20 
23.52 

17.68 
15.60 

13.46 
10.15 

12.62 
7.91 

12.38 
8.44 

Per   cent   operation   expense    to 
telephone  earnings  

35.9 

37.8 

37.2 

41.4 

40.6 

Per   cent   telephone   expense   to 
telephone  earnings  

71.0 

72.8 

75.1 

79.4 

78.1 

Per  'cent  maintenance  and  depre- 
ciation to  average  plant,  sup- 
plies, etc  

9.1 

8.4 

9.5 

8.9 

8.8 

Per  cent  increase  exchange  sta- 
tions *  

15.7 

26.5 

11.8 

6.4 

6.9 

Per  cent  increase  miles  exchange 
wire  *  

15.9 

33.2 

12.0 

9.2 

6.8 

Per  cent  increase  miles  toll  wire  * 
(excluding  long-distance  lines) 
Average  plant  cost  per  exchange 
station  (exchange  and  toll  con- 
struction,   excluding   long-dis- 
tance lines)  

21.3 

$260 

25.2 
$199 

11.5 
$142 

5.5 
$141 

0.9t 
$138 

Average  cost  per  mile  of  toll  wire 
(including  poles  and  conduits, 
•  excluding  long-distance  lines).  . 
Per  cent  gross  telephone  earnings 
to  average  plant  

$  81 
29.7 

$  71 
28.4 

$  66 
28.8 

$  69 
27.6 

$  70 
27.7 

Per  cent  total   net  earnings  to 
average  capital  obligations  
Per  cent  total   net  earnings  to 
plant  and  other  assets  f. 

9.76 
9  36 

8.85 
7.96 

7.52 
6.65 

6V  66 
5.51 

7.20 
5.84 

Per  cent  paid  out  on  an  average 
capital  obligations  

5.13 

6.10 

6.01 

5.88 

5.88 

Per  cent  paid  out  on  plant  and 
other  assets  J  

5.09 

5.57 

5.31 

4.87 

4.76 

*  Increase  during  year  shown,  over  previous  year. 

t  Small  increase  mainly  due  to  increase  in  radius  covered  by  exchange  rates. 

t  Book  value  of  plant  taken  which  was  less  than  reproduction  value. 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  325 

Telephone  Technology.  —  For  communication  between  a 
couple  of  relatively  near  points,  only  simple  equipment  is  neces- 
sary —  a  couple  of  telephone  sets  (transmitter,  battery,  re- 
ceiver and  call  bell)  and  a  line  wire.  When  telephones  are  idle, 
call  circuits  are  ready  for  use.  When  more  than  two  points  are 
to  be  intercommunicating,  a  wire,  or  a  pair  of  wires,  may  enter 
each  set  from  all  the  others  and  run  to  the  same  number  of  se- 
lector switches.  For  the  more  complicated  exchange  systems  in 
a  town,  all  the  subscribers  are  connected  by  separate  circuits 
which  enter  a  central  switching  office  and  go  to  an  indicator  and 
"  jack  "  or  set  of  spring  contacts.  In  a  small  place  the  jacks  are 
disposed  in  numbered  rows  and  two  subscribers  are  placed  in 
communication  by  flexible  conductors  between  jacks.  But  this 
simple  switchboard  serves  for  only  a  few  hundred  subscribers  at 
most  and  it  is  necessary  after  that  to  go  to  the  "  multiple  board.  " 

A  "  multiple  board  "  is,  in-its  ordinary  form,  a  switchboard  on 
which  the  subscribers'  line  jacks  are  duplicated  on  each  section, 
or  at  each  third  operator's  position,  so  that  each  operator  usually 
has  within  reach  a  line  jack  for  each  subscriber  in  that  exchange. 

Subscribers  then  are  divided  into  groups  of  about  300  and  call- 
ing jacks  and  indicators  for  each  group  are  placed  before  a  group 
of  operators.  Within  reach  of  each  group  of  operators  are  line 
jacks  for  the  entire  number  of  subscribers,  so  that  any  one  in 
these  operators'  groups  can  be  immediately  connected  to  any 
other  subscriber  in  the  exchange.  This  requires  a  great  duplica- 
tion of  jacks,  and  arrangements  are  necessary  for  showing  when  a 
desired  subscriber's  line  is  busy  and  when  a  conversation  between 
two  subscribers  has  ended. 

If  an  exchange  provides  for  4900  subscribers  (the  usual  limit 
of  an  ordinary  multiple  board,  after  which  a  second  exchange  is 
established  and  connected  by  trunk  lines),  the  switchboard  com- 
monly shows  16  sections  with  three  operators  at  each  section. 
Each  section  usually  has  seven  panels  on  each  of  which  700  lines 
would  terminate  on  jacks  —  making  78,400  jacks  on  the  complete 
board.  But  only  307  of  the  lines  coming  to  a  section  are  con- 
nected to  indicators  and  answering  jacks.  Each  operator's 
manipulation  of  panels  overlaps  her  neighbor's  in  that  section, 
which  helps  one  from  becoming  overtaxed  and  another  idle. 
A  few  standard  boards  have  been  made  for  9600  subscribers  — 
there  being  then  40  sections  of  eight  panels  each,  240  indicators 


326  PUBLIC  UTILITY  RATES 

and  answering  jacks  for  the  three  operators  of  each  section,  and 
1200  multiple  jacks  per  panel  or  384,000  for  the  exchange.  These 
figures  really  apply  to  boards  for  average  conditions  only.  The 
actual  number  of  sections  and  panels  depends  on  the  rate  at 
which  subscribers  call.  Special  requirements  arise  also  to  cause 
various  departures  from  ordinary  arrangements  of  a  board. 

It  should  be  noted  that,  for  a  little  less  than  double  capacity 
rise  between  the  4900  and  9600  subscriber  exchanges,  the  number 
of  jacks  and  line  extensions  has  had  to  be  increased  nearly  five 
times;  this  is  one  of  the  elements  entering  into  the  added  ex- 
pense of  service  in  large  exchanges.  If  it  were  attempted  to 
serve  24,000  subscribers  from  one  exchange  there  would  be  re- 
quired an  impossible  board  of  100  sections,  2000  panels,  2,400,000 
multiple  jacks,  and  300  to  700  operators.  The  multiple  would 
be  out  of  the  operator's  reach  entirely.  This  shows  why  it 
is  necessary  to  limit  a  city  exchange  to  a  certain  district  and 
connect  the  exchanges  by  special  lines.  When  there  is  more 
than  one  exchange  in  a  city,  two  separate  boards  are  provided 
—  commonly  designated  as  the  "  A  "  and  "  B  "  boards.  The 
"A"  board  is  a  regular  multiple  board  as  noted.  The  "B" 
board  usually  is  a  full  multiple;  each  subscriber's  line  has  aline 
jack  within  reach  of  each  "  B  "  operator.  From  trunk  jacks  on 
each  "  A  "  board,  lines  run  to  plugs  on  the  "  B  "  boards  in  every 
other  exchange  in  the  city  (as  many  lines  as  experience  shows 
necessary  to  handle  the  traffic).  Similarly,  auxiliary  "order" 
circuits  run  from  the  "  A  "  to  the  "  B  "  operators.  Then  if  a 
subscriber  calls  some  one  outside  his  own  exchange  district, 
his  "  A  "  operator  informs  the  proper  distant  "  B  "  operator  who 
connects  to  the  desired  subscriber's  jack  one  of  "A's"  trunk 
plugs  and  the  "A"  operator  uses  the  corresponding  trunk 
jack  as  though  it  were  a  subscriber's  line  jack  on  her  own 
board. 

In  most  cities  the  "  common-battery  "  system  is  used  in  which 
a  single  battery  at  the  central  office  operates  all  the  transmitters 
and  a  single  generator  rings  all  the  bells.  The  voltage  of  the 
common  battery  is  higher  than  was  that  of  the  local  batteries 
used  at  each  subscriber's  instrument.  This  introduces  many 
important  changes  in  the  equipments.  The  central .  operator 
is  called  by  switchboard  lamps  operated  on  central-battery  cur- 
rent controlled  by  the  subscriber. 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  327 

The  common-battery  system  was  preceded  by  the  magneto 
system  which  is  still  largely  used  in  the  smaller  places.  Each 
subscriber's  set  had  a  hand  generator,  or  "  magneto,"  for  calling 
central,  and  a  battery  for  working  the  transmitter. 

Most  business  offices  having  several  telephone  lines  have  a 
"  private-branch  exchange  "  or  a  small  board  tended  by  private 
employees.  With  these,  internal  communication  is  made  easy 
and  much  fewer  lines  to  the  city  exchanges  are  required.  The 
"  P.  B.  X."  boards  of  some  concerns  have  upward  of  15  operators. 

In  rural  districts  where  the  expense  of  long  single-  or  few- 
party  lines  is  prohibitive,  a  large  number  are  placed  on  one 
line  and  code  ringing  resorted  to.  As  many  as  20  subscribers 
may  be  on  one  such  circuit,  compared  with  two  or  four  on  town 
lines;  the  service,  of  course,  is  inferior  as  the  number  at'  parties 
rises. 

Automatic  Telephone  Systems.  —  To  avoid  the  large  number 
of  operators  required  in  an  exchange,  several  automatic  systems 
have  been  devised  substituting  mechanism  controlled  directly 
by  the  subscribers.  In  general,  the  subscriber  moves  a  dial 
on  his  telephone,  or  works  some  similar  contrivance,  to  send 
various  groups  of  electrical  impulses  to  the  exchange  where  re- 
lays step  up  contact  bars  accordingly,  to  connect  with  the  de- 
sired lines  and  ring. 

The  argument  against  automatic  systems  is  that  the  subscriber 
really  does  the  switching  which  an  operator  does  for  him  in 
the  manual  system;  the  subscriber  being  less  expert  is  apt  to 
be  slow  and  to  multiply  mistakes.  The  delicate  apparatus  re- 
quires very  expert  supervision  and  maintenance  to  preserve 
good  service. 

Several  semi-automatic  systems  have  been  brought  out,  one 
by  the  Bell  interests.  This  one  replaces  the  "  B  "  operator  in 
a  city  exchange  (whose  duties  are  largely  mechanical)  with  a 
selective  mechanism. 

Telephone  Service  Compared  with  Transportation.  —  Tele- 
phone utilities  are  most  decidedly  of  the  service  type  (as  defined 
on  page  5);  they  .cannot  acquire  or  store  a  product  against 
the  hours  of  maximum  demand,  and  their  plant  investment  is 
greatly  increased  by  effect  of  peak  loads.  The  service  is  a  pe- 
culiarly personal  one  —  that  of  bridging  distance  and  time,  and 
placing  in  communication,  in  contact,  the  minds  of  two  persons. 


328  PUBLIC  UTILITY  RATES 

It  is  even  more  personal  a  service  than  railway  passenger  trans- 
portation. Telephone  service  resembles  railway  freight  trans- 
portation in  that  usually  a  great  variety  of  service  is  furnished 
by  each  important  company  and  that  distributed  over  a  great 
geographical  area. 

The  large  number  of  different  services,  or  classes  of  service 
or  diverse  uses  of  service,  and  the  distribution  of  activities  over 
many  different  communities  and  states,  impose  somewhat  the 
same  difficulties  to  the  accurate  apportionment  of  expenses,  to 
the  definite  location  of  cost  of  an  individual  service,  and  to  the 
use  of  a  cost-of-service  rate  basis,  that  are  encountered  in  rail- 
way work.  Anyone  who  takes  up  in  detail  the  study  of  telephone 
service  costs  and  rates  immediately  realizes  the  complexity  in- 
troduced by  serving  separated  communities  in  different  ways, 
compared  with  the  simple  cases  of  water,  gas  and  electric  com- 
panies operating  within  the  confines  of  a  single  district  and 
giving  one  or  a  few  classes  of  impersonal  service.  In  the  case 
of  the  simpler  utilities,  cost-of-service  becomes  the  logical  basis 
of  scrutinizing  indiv  dual  rates.  As  an  utility's  activities  spread 
greatly  and  become  diversified,  then  value-of -service  looms  up  of 
greater  and  greater  importance  in  the  practical  adjustment  of 
charges. 

Importance  of  Adequate  Telephone  Service.  —  Earlier  in 
these  discussions  it  has  been  stated  that  adequate  utility  serv- 
ice generally  is  placed  ahead  of  low  rates,  and  that,  in  any  scru- 
tiny of  rates,  a  question  as  to  adequacy  of  service  is  necessarily 
involved.  A  query  then  must  arise  about  what  constitutes  ad- 
equate telephone  service.  Is  it  merely  furnishing  facilities  in 
each  of  the  communities  served  by  a  company  in  accordance 
with  the  prices  which  the  inhabitants  are  willing  to  support,  or 
is  it  something  more  comprehensive?  Asked  another  way:  Does 
"  adequate  service  "  necessitate  considering  the  interrelations  of 
the  various  communities  —  hamlets,  villages,  towns,  suburban 
districts,  cities,  manufacturing  centers,  residential  districts,  agri- 
cultural areas?  In  considering  each  question  it  becomes  ob- 
vious that  the  peculiar  personal  character  of  telephone  service, 
as  well  as  the  multiplication  of  classes  of  subscribers  and  the 
geographical  stretch  of  required  communication,  make  stand- 
ards of  adequate  service  different  from  those  applicable  to  a 
water,  gas,  or  electric  company  operating  within  the  confines 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  329 

of  a  single  district  and  having  any  one  customer  little  aware  of 
the  existence  or  absence  of  all  other  customers.  *jj 

In  the  United  States  the  spread  and  development  of  tele- 
phone service  is  very  much  greater  than  in  any  other  nation, 
and  to  a  very  great  measure  this  has  been  accomplished  without 
the  present  public  regulation  and  under  the  Bell  organization's 
idea  that  adequate  service  meant  an  universal  system  with  in- 
dividual rates  adjusted  one  to  another  more  in  proportion  to 
ratios  of  their  respective  values  to  subscribers  than  their  respec- 
tive "costs"  —  "costs"  being  here  considered  for  the  moment  as 
the  annual  expense  of  giving  a  subscriber  the  means  of  origina- 
ting traffic,  not  distributed  at  all  on  subscribers  called.  (There 
is  some  evidence  that  the  future  will  see  a  different  definition  of 
cost  —  one  that  (1)  will  place  on  some  subscribers  some  of  the 
expense  of  extending  into  unremunerative  districts  and  that  (2) 
will  apportion  between  both  parties  to  a  telephone  conversation 
the  expense  of  the  connection.  Such  a  definition  it  must  be 
emphasized  still  will  be  one  of  costs  and  not  of  rates,  though 
there  may  be  a  closer  relation  between  costs,  so  defined,  and 
rates.) 

Peculiarities  <of  Telephone  Investments.  —  The  phenomenon  of 
jumps  in  required  investment,  with  steadily  growing  service, 
is,  perhaps,  more  pronounced  in  a  telephone  utility  than  in  most 
others.  Whenever  demands  catch  up  with  facilities,  the  addi- 
tions then  made  must  be  in  part  more  than  sufficient  for  many 
years,  according  to  the  dictates  of  ordinary  foresight  in  pre- 
venting too  much  costly  piecemeal  construction.  In  the  tele- 
phone field  one  such  step  may  mean  the  erection  of  a  new 
building,  the  establishment  of  a  new  exchange,  the  installation 
of  a  new  switchboard,  and  the  construction  of  an  underground 
conduit  system.  The  interest  charges  on  such  plant  must  be 
allowed  to  enter  the  cost  computations  —  even  though  the  plant 
be  partly  idle,  if  only  prudently  extended.  Such  effects  may 
entirely  vitiate  cost  comparisons  for  two  communities  served 
by  the  same  concern,  or  for  the  same  community  at  different 
dates. 

The  brief  notes  already  given  on  telephone  technology  have 
been  sufficient  to  show  that  a  large  part  of  the  investment  in  a 
central  exchange  is  due  to  the  duplication  of  subscribers'  switch- 
board equipment  and  terminal  lines,  and  multiplication  of  oper- 


330  PUBLIC  UTILITY  RATES 

ators'  positions  in  order  to  handle  the  calls  that  are  made  in 
peak-load  hours.  The  shorter  the  hours  of  local  office  and  mer- 
cantile activity,  the  sharper  are  the  telephone-service  peaks  and 
the  greater  are  the  effects  in  increasing  investment  —  a  phe- 
nomenon which  is  more  pronounced  in  larger  cities. 

There  are  other  effects  (already  noted  under  the  review  of 
telephone  technology)  that  tend  to  make  unit  telephone  invest- 
ment rise  with  the  size  of  the  exchange  and  of  the  community. 
The  cost  in  the  largest  cities  is  unhanced  by  expensive  types  of 
construction  required  and  multiplication  of  exchanges.  There 
are  still  other  effects,  however,  that  tend  to  decrease  the  cost 
under  such  growth  —  the  reduction  in  average  length  of  line, 
the  economy  from  large-scale  operation,  etc. 

Development  of  Rate  System.  —  The  early  exploiters  of  Bell's 
invention  proceeded  as  is  common  with  patented  devices  —  they 
merely  rented  the  instruments  with  a  licence  for  use,  retaining 
title  to  all  the  important  equipment  and  supervising  up-keep. 
This  is  a  plan  that  has  been  preserved  even  though  the  funda- 
mental patents  have  long  since  expired.  The  first  charges  of 
the  Bell  promoters  were  $20  a  year  for  telephones  for  "  social 
service"  and  $40  for  business  use.  When  exchange  service 
started,  the  rates  had  to  be  made  without  experience  as  to  the 
costs  involved;  even  then  the  competition  of  the  Western 
Union  company  caused  the  first  desired  rate  in  some  cases  to 
be  cut  in  two.  However,  in  such  cases  there  was  a  later  rise 
for  which  the  transmitters  were  put  in,  or  metallic  circuits  and 
single-party  lines  used 

The  early  rates  for  telephone  service  were  flat  annual  sums; 
but  the  charges  were  not  the  same  to  all  in  the  same  locality. 
Customers  were  classified  by  the  service  they  took,  and  different 
annual  charges  made  for  business  and  residence  use,  for  one-party 
or  multi-party  subscribers.  But  there  was  for  years  generally 
no  change  in  the  basis  of  the  annual  charge  so  that  it  was  not 
in  any  way  dependent  on  the  extent  to  which  the  telephone  was 
used,  except  in  a  few  towns  and  cities  where  the  quantity  of 
service  was  considered.  Buffalo  and  San  Francisco  (1881)  were 
pioneer  cities  in  adhering  to  a  measured  basis.  Several  other 
places  used  this  basis  for  a  little  while  but  slipped  back.  In 
the  early  '80's  the  flat  rates  ran  from  $25  to  $100  or  over,  $48 
being  the  popular  price  most  often  found.  Up  to  1895  these 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  331 

flat  rates  for  unlimited  service  to  all  users  continued  to  be  em- 
ployed but  this  was  seen  then  to  be  a  great  handicap.  The 
development  of  a  practical  scheme  of  price  differentiation  accord- 
ing to  the  business  needs  of  the  patron  and  the  number  of  con- 
nections is  credited  to  E.  J.  Hall,  of  Buffalo,  and  U.  N.  Bethell, 
of  New  York.  Once  widely  introduced,  it  seemed  to  unlock  the 
business  —  from  1895  to  1900  the  subscribers  more  than  tripled, 
.by  1905  increased  to  11|  times,  by  1910  multiplied  to  17  times, 
and  by  1915  had  risen  to  37  times  the  earlier  figure. 

The  measured-rate  plan  was  applied  in  New  York  City  in 
1894;  it  appeared  elsewhere  quickly  after  that.  A  part  of  the 
New  York  1894  schedule  was  as  follows: 

ON  ONE-PARTY  LINES 

Initial  annual  charge,  $150  allowing  1000  calls,  extra  calls  $12  per  100 
"  "  "         172        "        1300     "         "        "       10       " 

"  «  "         225        "        2100    "         "        "        7       " 

ON  TWO-PARTY  LINES 

Initial  annual  charge,  $100  allowing    700  calls,  extra  calls  $15  per  100 
ii  a  ii          110        «          gOO    "         "        "      12       " 

Under  the  one-party  schedule  the  common  1894  charge  per 
single  call  varied  from  8  to  12£,  depending  on  the  number  made. 
This  cost  has  steadily  dropped  until  in  1915  it  ranged  from  3 
to  5 p. 

Value  of  Service  Used  in  the  Past.  —  The  best  defense  of  the 
industry's  use  of  a  basis  approaching  value  of  service,  rather  than 
cost,  in  adjusting  rates  is  what  has  been  accomplished  broadly 
in  the  development  of  telephone  utilities  in  America  in  the  past. 
There  is  practically  no  hamlet  now  but  what  is  connected  to  the 
outside  world  by  telephone  wires.  All  the  outlying  rural  dis- 
tricts are  connected  to  their  trading  and  social  centers.  All 
of  these  outposts  contribute  to  the  value  of  the  service  every- 
where throughout  a  company's  system;  for,  while  some  of  the 
subscribers  in  the  smaller  exchanges  probably  never  call  beyond 
their  local  office  and  seldom  ask  for  more  than  25  different  parties 
therein,  yet  in  the  smallest  exchanges  there  is  found  to  be  a  con- 
stant and  surprising  amount  of  toll  business. 

"  Value-of -service,"  as  employed  by  the  Bell  companies,  does 
not  mean  "all  the  traffic  will  bear";  it  means  rather  total 
expense  of  a  company  apportioned  over  towns,  cities  and  classes 


332  PUBLIC  UTILITY  RATES 

of  subscribers  in  proportion  to  the  relative  worths  of  the  services 
and  the  relative  abilities  to  pay. 

The  widest  development  of  telephone  service  that  can  be 
reasonably  stimulated  adds  to  the  benefits  of  all  connected, 
and  change  to  any  operating  or  administrative  policy  which 
would  hinder  present  development  or  cause  retrogression  in  the 
end  would  be  widely  regretted  by  the  public.  Therefore,  the 
substitution  of  cost-of -service  in  place  of  value-of-service  as, 
the  universal  criterion  of  rates  must  be  carefully  approached  in 
the  public  interest.  It  is  practically  certain  that  if  the  small  ex- 
change stood  unsupported  —  had  to  meet  all  its  expenses  by  its 
own  revenues  —  the  rates  would  have  to  be  so  high  as  to  cause 
many  of  the  subscribers  to  drop  away.  Similarly  within  more 
prosperous  areas,  if  the  full  fixed  and  operating  charges  on  the 
outlying  residential  lines  were  carried  by  those  customers  alone, 
there  would  be  few  of  them. 

The  more  the  whole  telephone  situation  is  studied  the  more  it 
is  realized  that  the  development  of  the  service  is  still  incomplete, 
still  removed  from  saturation  or  equilibrium.  Utterly  to  dis- 
regard the  ways  in  which  the  present  growth  has  been  attained 
would  be  expected  to  check  further  extension.  It  seems  to  have 
demonstrated  in  all  these  years  that  the  persons  who  most  want 
telephone  service  are  willing,  and  can  afford,  to  pay  whatever  is 
necessary  over  and  above  the  bare  cost  of  their  own  facilities  in 
order  to  permit  securing  the  maximum  number  of  subscribers 
who  may  have  serious  use  for  a  telephone. 

All  of  this,  of  course,  does  not  mean  that  all  the  old  rate 
schedules  have  been,  or  the  existing  ones  are,  completely  fair 
in  all  their  tariffs,  as  built  up  on  judgment  sometimes  incom- 
pletely fortified  by  a  knowledge  of  probable  costs  of  service. 
Such  weaknesses  as  exist,  however,  may  be  regarded  as  side 
effects  of  a  very  rapid  technical  and  commercial  development 
—  unrelated  errors  which  have  not  yet  been  eliminated. 

Commission  Regulation  of  Telephone  Rates.  —  From  the  pre- 
ceding discussions  of  the  important  part  that  "  value-of-service  " 
has  played  in  making  existing  telephone  rates,  and  still  must  play 
in  the  future  development  of  the  service,  it  is  obvious  that  an 
intimate  knowledge  of  municipal  development,  experience  in 
telephone  operation,  and  general  good  judgment  are  required 
for  the  greatest  success  in  telephone  rate-making.  The  handi- 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  333 

cap  which  most  regulating  commissions  experience  is  in  having 
a  large  enough  staff  of  men  with  sufficient  knowledge  of  tele- 
phone-system operation. 

It  is  undeniable  that  great  good  to  telephone  subscribers 
and  companies  alike  has  come  from  the  stricter  accounting  to 
which  the  operating  companies  have  been  called  in  recent  years. 
Telephone  companies  have  come  through  with  less  criticism 
than  have  other  types  of  utilities  subjected  to  public  regulation 
for  the  first  time  —  a  fact  that  speaks  well  for  the  aims  and 
efforts  of  the  telephone  officials.  The  reverse  of  over-capital- 
ization has  been  demonstrated;  but  it  has  been  seen  that  ten 
years  ago  the  telephone  companies  themselves  had  a  very  scant 
knowledge  of  the  true  value  of  their  plants  or  recognized  possi- 
bilities of  distribution  of  annual  costs  beyond  the  common  oper- 
ating items. 

The  standards  of  judging  telephone  rates  held  by  the  companies 
and  by  the  commissions  are  likely  not  to  coincide  for  years  to 
come,  if  ever.  The  operating  experience  of  a  company's  com- 
mercial engineers  naturally  impresses  on  them  the  importance  of 
value  of  service  and  the  debatable  features  of  every  basis  of 
apportioning  expense  items. 

Commission  telephone  rate-making  has  one  peculiar  difficulty. 
Here  perhaps  more  than  in  any  other  utility  service,  except 
possibly  in  railway  work,  the  claims  of  the  operating  company 
are  to  be  given  great  weight  when  the  commission  can  be  assured 
that  the  officials  are  honest  and  earnest  in  promoting  the  sub- 
scribers' welfare.  But  proper  attention  to  a  company's  claims 
is  very  apt  to  be  misconstrued  in  t"he  popular  mind  as  one  of 
those  surrenders  to  capital  which  politicians  have  been  wont 
to  picture.  While  recognizing  the  value  of  the  telephone  offi- 
cials' experience,  the  Commissions  cannot  rely  solely  on  such 
partisan  statements  and  still  hold  public  confidence;  they  are 
forced  to  find  some  basis  of  independent  judgment  and  they 
naturally  tend  to  take  up  the  cost  criterion  which  is  so  appli- 
cable in  restricted  local-utility  service. 

Commission  Study  of  Value  of  Service.  —  It  is  true  that  a 
commission  usually  must  present  a  good  exposition  of  its  studies 
in  order  to  justify  its  pronouncements  before  a  critical  public, 
and  this  naturally  leads  them  almost  invariably  to  attempt  to 
investigate  the  cost  of  a  given  service.  But  the  independent 


334  PUBLIC  UTILITY  RATES 

determination  of  value  of  service  is  equally  open.  It  is  only 
essential  that  a  commission  should  proceed  in  a  scientific  manner 
with  considerable  scope  of  plan,  compensating  thus  for  their  lack 
of  that  accumulated  operating  experience  and  long-trained  judg- 
ment which  the  telephone  companies'  officials  may  possess. 

If  it  be  accepted  in  a  given  case  that  the  rates  and  service  for  a 
single  community  are  not  to  be  scrutinized  isolated  from  those 
for  all  other  communities,  then  the  starting  point  for  a  value 
study  is  the  total  area  served  by  a  company  —  the  field  of  an 
operating  entity  distinguished  from  a  group  of  merely  affiliated 
interests.  A  first  step  is  to  list  the  several  communities  within 
the  given  area  and  to  apply  to  them  rating  coefficients  which 
shall  express  the  relative  differences  to  be  expected  in  value  of 
telephone  service  therein  —  differences  depending  on  such  in- 
dustrial and  social  factors  as  total  population,  percentage  of 
population  served,  proportion  of  foreign-born  and  illiterate 
persons,  average  income,  character  of  industries,  real-estate 
development,  etc.  Such  a  rating  index  of  cities  and  towns  then 
may  be  the  basis  of  informally  varying  the  price  of  a  given 
service  among  the  different  places,  proceeding  in  a  cut-and-try 
fashion  until  a  schedule  is  whittled  out  that  yields  the  gross 
income  considered  necessary. 

But  it  would  seem  logical  and  desirable  very  often,  for  a 
commission  to  push  this  sort  of  value  study  to  a  natural  con- 
clusion instead  of  resting  content  with  the  partial  results  com- 
monly accepted  as  sufficient.  To  start  with,  it  may  be  advisable 
to  preserve  intact  at  first  the  several  ratings  of  the  community 
in  regard  to  size  and  character  of  population,  character  of  indus- 
trial and  real-estate  development,  average  income  of  citizens, 
etc.  Then  it  may  be  necessary  to  list  alongside  of  these  the 
several  classes  of  service  within  the  municipalities  indexed,  and 
to  combine  the  various  ratings  into  a  rating  coefficient  for  each 
class  as  it  exists  in  several  places,  and  as  one  or  more  of  the 
community  characteristics  affect  its  worth  from  town  to  town. 

In  this  way  definite  numerical  comparative  ratings  may  be 
recorded  for  the  value  of  all  classes  of  service.  Multiply  the 
number  of  subscribers  in  each  class  of  each  town  by  the  proper 
combined-rating  coefficient,  add  the  products  and  there  results 
a  number  which  may  be  called  the  "  expense  (or  revenue)  dis- 
tributor "  of  the  system.  Dividing  the  total  annual  expense 


PROBLEMS  OF  TELEPHONE  RATE-MAKING 


335 


of  the  company  —  including  fair  return  on  fair  value  —  or  the 
total  required  revenue,  by  this  expense  distributor,  gives  a 
"  carrier  "  which  may  be  multiplied  by  the  rating  for  any  class 
of  any  town  to  show  a  sort  of  average  flat  rate  that  would  be 
indicated  as  fair  for  that  town  and  class  of  customer.  Multi- 
plying the  carrier  by  both  class  rating  and  number  of  telephones 
in  a  community  of  that  class  yields  the  total  return  that  should 
come  from  that  class  as  a  whole.  Summing  such  expected  class 
returns  gives  the  income  for  the  local  company.  How  such  a 

STATE  TELEPHONE  Co.    VALUE-OP-SERVICE  STUDY.    ANNUAL  EXPENSES 
(LESS  COST  OF  TOLL  SERVICE)  $1,262,905 


Popu- 
lation 
Rating 

Industrial 
and  Real- 
Estate 
Rating 

Sub- 
scribers 
Income 
Rating 

Service 
Class 
Rating 

Num- 
ber of 
Tele- 
phones 

Class 
Product 

Annual 
Value 
Rate 

City  A: 
Subscribers, 
Class  1   .... 

100 

50 
10 

)• 

1  2.5 

h 

JO.  4 

100 
90 
80 
40 

100 
90 
80 
40 

100 
90 

85 
50 

85 
75 
50 

80 
75 
50 

75 
40 

65 
35 

100 
80 
70 
20 

100 
90 
80 
30 

90 
80 
70 
30 

70 
60 
30 

65 
50 
30 

50 
25 

40 
25 

100 

85 
75 
25 

95 
80 
70 
20 

90 
75 
65 
20 

50 
40 
20 

45 
35 
20 

35 
15 

25 
15 

3,000 

1,000 
2,000 
4,000 

1,500 
500 
1,000 
2,000 

300 
100 
200 
400 

100 
100 
300 

50 
50 
200 

25 
125 

15 

85 

300,000 
85,000 
150,000 
100,000 

142,500 
40,000 
70,000 
40,000 

27,000 
7,500 
13,000 
8,000 

5,000 
4,000 
6,000 

2,250 
1,750 
4,000 

875 
1,800 

375 

1,275 

$125.00 
106.25 
93.75 
31.20 

100.00 
100.00 
87.50 
25.00 

75.00 
94.00 
81.50 
25.00 

62.50 
50.00 
25.00 

56.50 
43.75 
25.00 

43.75 
18.75 

31.25 
18.75 

Class  2  

Class  3  

Class  4  

City  B: 
Subscribers: 
Class  5  
Class  6  

Class  7  

Class  8  

City  C: 
Class    9  

Class  10.  .  .  .  .. 
Class  11  

Class  12  

Town  E: 
Class  13  

Class  14  

Class  15  

Town  F: 
Class  16  

Class  17  

Class  18  

Village  G: 
Class  19.  ...  .. 

Class  20  

Village  H: 
Class  21  

Class  22  

1,010,325 

«i 


=  $1.25;  for  Class  2,  85  X  $1.25  =  $106.25,  etc. 


336  PUBLIC  UTILITY  RATES 

study  is  pursued  is  partially  indicated  in  the  accompanying 
table  made  up  for  a  hypothetical  concern  for  purely  illustrative 
purposes.  There  would  be,  in  any  actual  application  of  the  idea, 
several  columns  in  place  of  the  two  columns  here  given  up  to 
"  industrial  and  real-estate  rating  "  and  "  subscribers-income 
rating."  If  such  a  table  indicated  that  some  changes  in  rates 
appeared  advisable,  study  of  the  effect  of  the  changes  on  the 
number  of  subscribers  in  each  class  ought  to  be  made  and  a  new 
table  prepared  embodying  conditions  as  they  might  be  with  the 
different  number  of  subscribers. 

Telephone  Cost  Analysis.  —  The  general  tendency  has  been 
mentioned  of  utility  commissions  attempting  to  deduce  probable 
figures  for  the  cost  of  telephone  service  rendered  to  various 
classes  of  subscribers.  Therefore,  it  is  of  interest  to  append  a 
few  notes  on  how  attempts  have  been  made  to  compute  the 
things  called  "  cost."  It  will  be  seen  that  this  "  cost  "  is  to  a 
large  extent  a  matter  of  definition,  and  cannot  be  as  reliable  for 
a  basis  of  rates  as  the  service  costs  which  may  be  deduced  for 
water,  gas  and  electric  utilities.  Detailed  telephone-cost  figures 
are  of  interest  and  significance  in  connection  with  value-of- 
service  studies  since  they  represent  expense  distribution  on 
another  basis. 

The  expenses  of  a  telephone  exchange  and  connected  plant 
can  be  directly  allocated  or  apportioned  on  the  several  classes  of 
customers  less  than  can  be  done  in  the  case  of  most  other  non- 
transportation  utilities.  While  the  number  of  subscribers  meas- 
ures, in  a  way,  the  size  of  a  telephone  system,  yet  the  investment 
per  subscriber  is  not  parallel  to  the  cost  per  kilowatt  of  capacity 
of  an  electricity-supply  works  or  per  million  gallons  possible 
daily  output  from  a  water-works.  Some  of  the  exchange  equip- 
ment installed  to  secure  good  peak-hour  service  is  a  duplication 
—  an  excess  —  of  equipment  that  would  be  sufficient  for  the 
same  subscribers  with  uniform  time  distribution  of  their  calls. 
All  this  extra  equipment  is  reserved  for  these  particular  peoples' 
use;  it  cannot  be  diverted  to  the  use  of  other  persons  or  classes 
in  off-peak  hours,  so  that  there  can  be  no  economies  secured  by 
building  up  non-peak  business  to  use  it  while  it  would  be  other- 
wise idle. 

The  annual  costs  of  telephone  service,  as  a  whole  in  a  given 
place,  can  be  variously  split  into  several  factors,  for  instance:  (1) 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  337 

interest,  retirance  and  maintenance  on  that  service-plant  invest- 
ment which  is  independent  of  peak  service  or  number  of  calls 
(subscribers'  lines  and  instruments,  a  part  of  switchboards,  of 
buildings,  and  of  real  estate) ;  (2)  interest,  retirance  and  main- 
tenance on  investment  which  depends  on  peak  load  —  on  the 
number  of  calls  made  when  most  subscribers  are  calling  simul- 
taneously —  (part  of  switchboards,  auxiliary  equipment,  build- 
ings, land,  and  of  duplication  of  subscribers'-line  terminals  and 
exchange-connecting  trunk  lines);  (3)  those  operating  costs 
which  depend  on  the  mere  existence  of  a  subscriber  whether 
calling  or  idle  (including  most  of  the  billing  and  collecting  ex- 
pense, some  of  the  operators'  wages  and  overhead  burden  for 
supervision,  management,  etc.);  (4)  operating  costs  dependent 
on  total  calls  made  or  received  (the  larger  part  of  switchboard 
operators'  wages  and  related  overhead  items,  part  of  the  ac- 
counting expense  in  the  case  of  measured-local  and  toll-line 
service,  etc.). 

Even  such  a  broad  division  of  expense  cannot  be  made  wholly 
by  direct  assignment.  Many  items  require  somewhat  arbitrary 
apportionment  over  more  than  one  group.  The  resulting  fig- 
ures, moreover,  are  of  little  value  unless  the  assumptions  are 
plainly  stated  under  which  apportionments  are  planned;  and 
when  the  assignment  and  apportionment  are  carried  further,  to 
groups  of  customers  say,  then  the  number  of  assumptions  grows 
surprisingly  and  their  validity  becomes  more  and  more  debatable 
—  no  matter  whether  company  or  commission  stands  sponsor 
for  them. 

Chicago  Telephone  Studies.  —  About  the  first  important  tele- 
phone rate  case  was  the  Chicago  1907  survey  by  a  special  engi- 
neering commission.  Here  for  the  first  time  there  was  an  adequate 
exposition  of  the  complexities  of  the  commercial  side  of  telephony, 
and  the  discovery  that  the  expedients  which  dictated  rates  were 
not  based  on  detailed  data  of  the  operating  conduct  of  the  busi- 
ness. Greater  use  of  a  measured  service  was  recommended  to 
enable  imposing  the  heaviest  charges  on  the  heaviest  users. 

Massachusetts  Commission  Cases.  —  In  1906  the  Massa- 
chusetts Highway  Commission,  which  was  charged  with  the 
oversight  of  telephone  utilities,  began  hearings  on  numerous 
complaints  of  service,  overcapitalization  and  discrimination  on 
the  part  of  the  Bell  company  (New  England  Telephone  &  Tel- 


338  PUBLIC  UTILITY  RATES 

egraph  Co.)  in  the  Boston  Metropolitan  district.  Preliminary 
accounting  and  engineering  examinations  in  1907  and  1908  led 
to  an  appraisal  of  the  entire  company's  plant,  and  to  acceptance 
of  accounting  practice  better  able  to  show  traffic  distribution, 
costs  of  operation  and  maintenance,  and  sources  of  revenue. 

In  the  first  place  it  was  shown  that  the  plant  was  worth  20% 
in  excess  of  the  stock,  bond  and  note  obligations.  The  gross 
collections  were  3.46^  per  completed  call,  while  the  large  users 
having  unlimited  flat-rate  service  paid  only  |  to  2^  per  call  — 
and  the  smaller  users  paid  from  6  to  10^.  The  result  was  a 
smaller  development  of  the  small  users  than  possible  and  de- 
sirable. 

A  zone  system  of  rates  was  made  by  which  a  given  subscriber's 
tariff  applied  within  the  territory  commonly  used  by  the  ma- 
jority of  local  subscribers  with  toll  charges  for  calls  between 
more  distant  zones.  The  individual  rates  were  adjusted  to 
furnish  service  to  the  small  user  on  the  lowest  yearly  charge 
that  appeared  fair,  adjusting  the  other  prices  in  accordance  — 
also  bearing  in  mind  that  the  metropolitan-district  was  fairly 
to  bear  some  of  the  expense  of  superior  service  imposed  on  the 
state  as  a  whole. 

Wisconsin  Commission  Cases.  —  Beginning  with  1907  the 
Wisconsin  Railroad  Commission  has  exercised  as  complete  juris- 
diction over  telephone  systems  as  over  other  utilities.  How- 
ever, it  has  proceeded  slowly  and  carefully.  One  of  the  first 
things  .changed  was  discrimination  by  free  and  reduced-rate  serv- 
ice for  quasi-public  locations.  Rules  for  standard  quality  of 
service  were  next  adopted.  A  statute  of  1911  obliged  physical 
connections  between  different  systems  at  proper  compensation, 
and  a  large  number  of  cases  of  that  sort  have  been  settled.*  , 

The  Wisconsin  commission  in  its  rate  cases  has  proceeded 
slowly  with  the  use  of  a  cost-of-service  basis  of  scrutiny.  But 
it  has  finally  gone  the  farthest  of  any  commission  in  the  devel- 
opment of  a  cost  analysis  for  telephone  services.  Late  in  1915 
it  presented  a  carefully  arranged  outline  of  a  complete  and  fairly 
logical  cost  analysis  applied  to  a  small  exchange  (see  Re  St.  Croix 

*  See  typically  F.  Winter  v.  La  Crosse  Tel  Co.,  1913;  11  Wis.  R.  R.  Comm. 
Rep.  748;  1914,  15  Wis.  R.  R.  Comm.  Rep.  36;  A.  E.  Monroe  v.  Clinton  Tel.  Co., 
1912;  10  Wis.  R.  R.  Comm.  Rep.  598;  E.  D.  McGowan  v.  Rock  County  Tel. 
Co.,  1914;  14  Wis.  R.  R.  Comm.  Rep.  529. 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  339 

Telephone  Co.,  Dec.  12,  1915;  P.  U.  R.  1916  A  552).  The  most 
notable  idea  embodied  there  was  the  development  of  expense 
apportionment  on  the  basis  of  calls  terminating  as  well  as  origi- 
nating with  a  given  class  of  subscriber.  In  a  later  case  (P.  B. 
Bogart  v.  Wis.  Tel.  Co.,  April  18,  1916;  P.  U.  R.  1916  C  1020)  a 
large  city  service  was  studied  in  the  same  way  and  some  account 
taken  of  extra  investment  caused  by  peak-load  service. 

Classification  of  Subscribers.  —  Separation  of  costs  into  such 
factors  as  (1)  those  dependent  on  number  of  calls,  (2)  those  de- 
pendent on  peak  loads,  (3)  those  dependent  on  mere  existence  of 
subscribers,  and  (4)  those  dependent  on  number  of  calls  made, 
does  not  directly  lead  to  a  figure  for  cost  of  carrying  the  particu- 
lar classes.  Such  an  analysis  may  be  a  preliminary  to  some  other 
apportionment. 

It  is  necessary  in  approaching  the  problems  of  telephone 
cost  analysis,  as  in  the  case  of  other  utilities,  to  start  a  detailed 
study  by  making  some  classification  of  customers,  the  members 
of  the  groups  having  similar  needs,  and  asserting  that  it  is 
reasonably  just  to  denote  the  cost  of  serving  one  customer  as  the 
average  for  his  class.  The  number  of  classes  may  run  up  toward 
40  in  some  places,  but  for  all  practical  purposes  many  of  these 
classes  are  so  unimportant,  or  are  sufficiently  similar  that  they 
may  be  consolidated  into  the  more  important  ones.  A  classi- 
fication may  be,  for  instance,  into  (1)  large  or  high- value  business 
users,  (2)  small  or  low-value  business  subscribers,  (3)  large  or 
high-value  residence  users,  (4)  small  or  low-value  residences, 
(5)  rural  lines,  (6)  toll  calls.  Such  a  classification  would  vary 
greatly  in  various  communities  and  as  here  given  should  not  be 
taken  as  fixed,  or  inflexible,  or  indeed  as  more  than  imperfectly 
illustrative.  In  some  medium-sized  places  it  might  possibly 
turn  into:  (1)  direct-line  or  single-party  measured-service  busi- 
ness subscribers,  (2)  multi-party  flat-rate  business  lines,  (3) 
direct-line  flat-rate  residential  subscribers,  (4)  two-party  meas- 
ured-service residential  subscribers,  (5)  four-party  flat-rate  resi- 
dence lines,  (6)  coin-box  lines,  (7)  multi-party  flat-rate  rural 
lines,  (8)  toll  service.  In  smaller  places  it  might  be  simply:  (1) 
business  subscribers,  (2)  residential  subscribers,  (3)  rural  lines, 
(4)  unowned  connecting,  or  "  foreign  rural "  lines,  (5)  toll 
service.  The  need  of  including  toll  service  as  a  separate  class  of 
customers  is  obvious.  Toll  calls  are  distinct  from  all  calls  within 


340  PUBLIC  UTILITY  RATES 

an  exchange  area,  are  separately  accounted  for  and  are  billed  at 
definite  rates.  « 

Bases  for  Apportioning  Expense.  —  An  attempted  apportion- 
ment of  annual  cost  of  service  upon  the  several  classes  of  custom- 
ers cannot  be  made  on  the  same  basis  for  all  items  of  expense 
involved.  Here  again  local  conditions  intervene  and  prevent 
any  closely  fixed  scheme  from  being  broadly  or  universally 
applicable.  But  a  system  of  apportionment  found  logical  and 
acceptable  in  one  case  is  generally  illustrative  and  usually  sug- 
gestive of  proper  procedure  in  other  cases;  the  changes  which 
should  be  made  in  the  basis  of  apportioning  this  or  that  item,  or 
group  of  items,  usually  can  be  seen  without  great  difficulty. 

Sometimes  items  have  been  apportioned  in  proportion  to  num- 
ber of  telephones  —  "  substations  "  in  telephone  parlance. 
Others  have  been  apportioned  in  proportion  to  the  number  of 
lines,  irrespective  of  substations  thereon.  Some  have  been 
allocated  according  to  the  number  of  miles  of  wire;  some  in  pro- 
portion to  the  number  of  calls  originated;  and  some  according 
to  the  number  of  calls  originated,  the  time  of  day  and  the  relative 
time  consumed  for  each  class  of  customer.  Items  of  expense 
which  are  so  general  that  no  special  basis  of  apportionment 
is  evident  have  been  split  up  in  proportion  to  the  several 
aggregates  of  apportionment  upon  the  various  classes  of  cus- 
tomers. 

Adjusting  for  Interdependence.  —  Such  apportionments  of  a 
local  system's  expense,  upon  its  several  classes  of  customers  as 
outlined,  usually  have  been  based  on  an  independence  of  the 
service  rendered  to  the  several  classes  which  did  not  exist. 
When  a  business  customer,  for  instance,  calls  a  residence  cus- 
tomer, each  one  really  uses  the  other's  line  and  telephone  as 
well  as  his  own.  When  a  residential  subscriber  calls  some  other 
residence,  each  uses  two  residential  lines  and  substations.  That 
in  general  describes  the  inter-class  participation  in  use  of  equip- 
ment and  gives  a  plausible  (but  not  unassailable)  excuse  for 
demanding  that  a  good  cost  allocation  should  equitably  redis- 
tribute over  all  the  classes,  the  expenses  for  which  otherwise  the 
respective  groups  would  be  liable  independently. 

The  Wisconsin  state  commission  has  probably  gone  the  farthest 
of  all  public  bodies  in  developing  such  a  cost  analysis  and  late  in 
1915  it  began  to  apply  a  scheme  for  redistributing  certain  ex- 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  341 

penses  on  the  basis  of  calls  received  as  well  as  calls  made.  (See 
Re  St.  Croix  Telephone  Co.,  Dec.  12,  1915;  P.  U.  R.  1916  A  552.) 

Wisconsin  Cost  Analysis.  —  It  is  not  necessary  here  to  dis- 
cuss at  length  the  recent  Wisconsin  telephone  cases;  but  it  is 
useful  to  point  out  some  of  the  more  significant  and  suggestive 
features  of  the  cost  analysis.  The  St.  Croix  case,  already  men- 
tioned, related  to  a  small  local  system  showing  about  $28,000 
cost  new  and  $19,500  present  worth  of  physical  property.  The 
village  served  (Richmond)  had  only  2000  population,  but  there 
were  377  subscribers  within  it  and  501  outside.  The  maximum 
rates  were  only  $30  per  year. 

The  principal  expense  items  for  such  a  small  system,  according 
to  the  Wisconsin  scheme  of  accounts,  were: 

1.  Exchange  operators'  salaries, 

2.  Exchange  expenses, 

2a.   Directory  and  stationery, 
2b.  Fuel,  water,  light  and  building  maintenance, 
2c.   Power  and  freight  (largely  on  storage  batteries), 
2d.  Miscellaneous, 

3.  Exchange  maintenance, 

4.  Wire-plant  maintenance  and  operation, 

5.  Substation  maintenance  and  operation, 

6.  Commercial  expense, 

7.  General  and  undistributed  expense, 

8.  Interest  and  depreciation. 

In  the  first  distribution,  "1  —  Operators'  salaries "  was 
divided  between  "  local  "  and  "  toll  "  service  in  proportion  to 
the  actual  time  spent  on  the  local  and  toll  boards.  The  item, 
"  2a — Directory  and  stationery,"  was  divided  among  the 
classes  in  proportion  to  the  number  of  subscribers  in  each.  The 
item,  "  2b —  Fuel,  water,  light  and  building  maintenance,"  was 
allocated  on  toll  and  local  business  in  accordance  with  space 
requirements;  the  local  fraction  was  split  among  subscribers' 
classes,-  half  in  proportion  to  number  of  stations  and  half  in  pro- 
portion to  number  of  lines.  The  item,  "  2c  —  Power  and 
freight,"  was  apportioned  according  to  the  terminating  calls  — 
weighted  to  correct  for  code  ringing  on  rural  lines.  The  item, 
"  2d — Miscellaneous,"  was  divided  as  an  overhead  on  the  pre- 
ceding three  items.  The  account,  "3  —  Exchange  mainte- 


342  PUBLIC  UTILITY  RATES 

nance,"  was  split  up  half  in  proportion  to  the  number  of  lines  per 
class  and  half  according  to  originating  calls;  "4 — Wire-plant 
maintenance  and  operation  "  was  distributed  in  proportion  to  the 
wire-miles  per  class;  "  5 — Substation  maintenance  and  opera- 
tion "  was  allocated  according  to  the  number  of  instruments. 
The  item,  "6 — Commercial  expense,"  was  split  between  toll 
and  local  business  after  a  scrutiny  of  the  uses  for  sub-items; 
then  the  local  fraction  was  distributed  in  proportion  to  the 
number  of  billings  made  per  class.  Item  "7 — General  and 
undistributed  expense  "  was  not  touched  until  later.  Finally 
for  "8 —  Interest  and  depreciation  "  an  appraisal  was  made  to 
show  the  kind,  investment  and  life  of  equipment  directly  serving 
each  class  of  service;  for  equipment  not  definitely  assignable  to 
classes  the  retirance  was  neglected  until  a  little  later.  Interest 
was  handled  similarly.  This  ended  the  first  assignment,  which 
it  is  seen  was  not  a  complete  one. 

The  second  assignment  was  then  started  —  reapportioning  the 
costs  as  assessed  on  the  several  classes  in  proportion  to  their 
activity  in  originating  and  terminating  calls.  A  traffic  study 
was  necessary  to  measure  this  inter-class  activity  —  to  find  the 
calls  residence-to-residence,  residence-to-business,  business-to- 
business,  residence-to-rural,  etc.  The  residence-residence  calls 
were  multiplied  by  two  (since  they  were  recorded  as  origi- 
nating calls  only)  and  charged  all  to  the  residence  class.  The 
business-business  calls  were  similarly  handled.  The  residence- 
business  terminating  and  originating  calls  were  added  and  charged 
half  against  the  business  class  and  half  against  residence;  and 
so  on  through  all  the  possible  combinations. 

The  reapportionment  of  expenses  already  tentatively  as- 
signed to  classes  was  then  taken  up  class  by  class.  For  instance, 
the  first  tentative  amount  of  residence-class  expense  was  re- 
divided  among  all  the  classes  in  proportion  to  the  number  of 
residence  conversations  they  were  concerned  with.  Thus  the 
residence  class  would  get  finally  a  portion  of  the  first  residence 
costs,  a  portion  of  the  first  business-class  costs,  a  portion  of  the 
rural-line  costs  and  so  on,  each  of  these  portions  being  in  part 
proportional  to  the  number  of  conversations  which  residential 
subscribers  had  with  the  several  classes  enumerated.  Finally 
the  items  of  "  General  and  undistributed  expense  "  and  "  In- 
terest and  retirance  on  unassignable  equipment  "  (which  had 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  343 

been  left  suspended)  were  apportioned  in  proportion  to  the  final 
expense  sums  levied  on  the  various  classes. 

This  would  have  completed  the  finding  of  class  costs  in  the 
St.  Croix  case,  except  that  the  "  foreign-rural  "  group  had  been 
assessed  a  portion  of  the  St.  Croix  exchange  costs,  while  the  St. 
Croix  subscribers  using  the  unowned  foreign  lines  paid  none  of 
the  costs  of  these  lines.  To  remedy  this  the  expenses  of  the 
privately  owned  foreign  lines  were  distributed  over  all  classes 
just  as  were  the  company  exchange  costs.  This  gave  an  addition 
to  each  St.  Croix  class  and  a  residue  for  the  privately  owned 
foreign  lines.  The  sum  of  these  class  additions  deducted  from 
the  aggregate  apportionment  of  company-system  costs  on  the 
foreign-rural  group  gave  the  uncompensated  part  of  the  cost  of 
switching  the  foreign  lines. 

This  yielded  a  "  cost  "  of  serving  each  class  of  customer. 
Dividing  that  figure  by  the  number  of  subscribers  in  the  class 
showed  an  average  cost  of  serving  one  of  them,  and  afforded  a 
figure  which  was  compared  with  the  prevailing  flat  rate. 

Cost  Analysis  in  Milwaukee  Case.  —  About  four  months  after 
the  St.  Croix  case,  the  Wisconsin  Commission  applied  and  ex- 
tended the  scheme  of  costs  analysis  there  laid  down  to  the  large 
telephone  system  of  Milwaukee,  which  had  been  complained  of 
as  having  unreasonable  rates.  This  company's  property  was 
valued  at  $5,269,000,  compared  with  a  book  cost  of  $5,001,000. 
There  was  no  switching  service  for  foreign-rural  lines,  but  there 
were  40  classes  of  customers,  including  such  as  private-branch 
exchanges,  nickel-slot  stations,  one-,  two-,  and  four-party  lines, 
and  both  flat-rate  and  measured  services.  Large  commercial 
department  expenses  were  involved. 

The  system  of  accounts  kept  by  the  Wisconsin  Telephone  Co., 
as  studied  in  the  Milwaukee  case,  were  arranged  as  follows : 

1.  General  expense, 

2.  Commercial  expense, 

3.  Traffic  expense, 

4.  Repair  expense, 

5.  Substation  removals  and  changes, 

6.  Depreciation  [retirance]  on  plant, 

7.  Rights,  privileges,  and  use  of  property, 

8.  Insurance, 

9.  Taxes, 
10.  Interest. 


344  PUBLIC  UTILITY  RATES 

While  the  cost  apportionment  in  this  case  followed  the  prin- 
ciples laid  down  in  the  St.  Croix  case,  it  required  the  extension 
of  those  ideas  since  the  trunking  system  was  employed  in  Mil- 
waukee between  exchanges  with  heavy  multiple  equipment,  and 
because  the  effect  of  peak-loads  in  increasing  investment  was 
considerable.  How  some  of  these  new  matters  were  handled 
will  be  shown  briefly. 

Interest  and  retirance  on  trunking  central-office  equipment 
(9  per  cent  of  total  central-office  investment)  were  apportioned 
one-third  on  the  basis  of  originating  and  terminating  trunked 
calls  for  each  class  at  the  time  of  city  peak  load  (7  A.M.  to  8  P.M.) 
and  two-thirds  on  the  basis  of  total  originating  and  terminating 
calls.  No  reapportionment  of  this  was  made  on  the  basis  of 
interclass  participation. 

The  line-terminal  interest  and  retirance  (32  per  cent  of  the 
central-office  investment)  was  apportioned  directly  to  the  classes 
for  which  the  investment  was  made,  and  later  reapportioned  with 
other  class  costs  in  accordance  with  the  interclass  participation. 

The  interest  and  retirance  on  much  of  the  remaining  central 
office  equipment  (keyboard,  10  per  cent  of  total;  power  plant, 
8  per  cent;  desk  and  testing  apparatus,  3  per  cent)  were  ap- 
portioned among  the  various  classes  of  subscribers  —  two-thirds 
according  to  the  day's  (24  hours')  total  originating  and  termi- 
nating calls  and  one-third  according  to  percentage  of  total 
peak-load  calls  caused  by  each  class.  No  reapportionment  was 
made. 

In  considering  the  interest  and  depreciation  on  multiple  equip- 
ment (38  per  cent  of  total  central-office  investment)  part  was 
allocated  over  the  classes  in  proportion  to  the  number  of  lines 
(two-party  lines  being  given  a  weighting  of  two)  and  part  in  pro- 
portion to  the  ration  of  average  to  peak-load  total  traffic.  The 
first  fraction  was  later  reapportioned  but  the  second  was  not. 

The  expense  of  supervising  the  commercial  department  was 
split  into  two  parts  for  apportionment.  One  part  was  pro- 
portioned to  the  aggregate  of  "  advertising,"  "  canvassing," 
"  uncollectable  accounts,"  and  thrown  in  with  the  general  over- 
head expenses  to  be  later  distributed  according  to  amounts  of 
direct  apportionments  on  the  several  classes.  The  other  part 
was  distributed  as  an  overhead  on  several  accounts:  (1)  "  direc- 
tory," which  was  divided  half  in  proportion  to  number  of  inser- 


PROBLEMS  OF  TELEPHONE  RATE-MAKING  345 

tions  to  which  the  classes  were  entitled  and  half  in  proportion  to 
number  of  directories  supplied;  (2)  "  revenue  accounting/'  and 
(3)  "  revenue  collecting,"  both  of  which  were  split  up  after  in- 
spection of  employees'  duties  and  were  not  reapportioned. 

"  Pay-station  commissions  "  were  divided  among  pay-station 
classes  on  the  basis  of  number  of  origination  ca].ls.  These 
apportionments  were  later  reapportioned.  "  Traffic  super- 
vision "  was  apportioned  over  various  underlying  accounts  as  an 
overhead.  Those  fractions  laid  on  "  operators'  wages,"  "  rest 
and  lunch  rooms,"  "  operators'  schooling,"  "  miscellaneous  oper- 
ating expense,"  "  pay-station  salaries,"  were  considered  to  be 
final  apportionments,  as  the  apportionment  of  these  sub-ac- 
counts took  into  consideration  both  originating  and  terminating 
traffic. 

The  items  "central-office  rent,"  "real-estate  repairs,"  "real- 
estate  interest  and  depreciation,"  other  than  real-estate  expense 
for  Grand  Building,  stables,  garages,  etc.,  were  consolidated 
for  apportionment;  the  division  was  made  similarly  to  main 
real-estate  expense  —  on  "  canvassing,"  "  revenue  collecting," 
"  service  inspection,"  "  rest  and  lunch  rooms,"  "  operators' 
schooling,"  "central-office  rent,"  "pay-station  expense,"  "wire- 
chief  expense,"  and  "  supply  expense." 

"  Pay-station  expense  "  was  split  into  two  parts  and  one 
apportioned  over  the  attended  pay-stations  —  half  in  propor- 
tion to  substations  (later  reapportioned)  and  half  in  proportion 
to  total  traffic  (not  reapportioned);  the  other  part  was  appor- 
tioned over  non-attended  pay-stations  in  proportion  to  number 
of  substations  and  was  later  reapportioned. 

The  item  "  repairs  supervision  "  was  prorated  over,  or  added 
to,  subsidiary  accounts  ("  wire-plant  repairs,"  "  central-office 
equipment  repairs,"  and  "  substations  repairs  ")  and  apportioned 
with  these.  The  handling  of  private-branch-exchange  expenses 
is  of  interest;  charges  for  maintenance,  removal  and  change,  and 
supervision  of  repairs  were  divided  among  the  P.  B.  X.  classes  on 
the  basis  of  number  of  lines  connected.  On  account  of  intra- 
office  use  of  the  P.  B.  X.  equipment  (for  intercommunicating 
service),  half  of  these  P.  B.  X.  expense  items  named  were  con- 
sidered as  finally  allocated  when  placed  in  accordance  with 
number  of  lines,  and  half  were  considered  reapportionable. 

So  far  after  the  first  attempt  to  apportion  expense,  it  is  seen 


346  PUBLIC  UTILITY  RATES 

that  there  were  three  groups  of  items:  (1)  finally  placed  items, 
(2)  reapportionable  items,  and  (3)  unassigned  items.  The  sum 
of  reapportionable  items  for  each  class  was  redivided  among  all 
the  classes  in  proportion  to  the  proportions  each  showed  of  total 
originating  and  terminating  calls,  as  already  worked  out  in  the 
St.  Croix  case.  The  sums  thus  reassigned  to  the  several  classes 
gave  a  new  partial  total  for  each  class,  to  which  were  added  the 
final  distributions  made  at  the  start.  Upon  these  sums  the  un- 
distributed expenses  were  laid  as  an  overhead  charge. 

The  4?  Per  Cent  Payments  to  Parent  Bell  Company.  —  One 
of  the  most  misunderstood  items  of  expense  which  have  figured 
in  telephone-rate  cases  is  that  of  payments  of  4|  per  cent  of  gross 
earnings  by  the  Bell  operating  companies  to  the  central  concern, 
the  American  Telephone  and  Telegraph  Co.  This  fee  has  been 
approved  in  Wisconsin*  and  Maryland,  f 

The  Wisconsin  Commission  reported  that  it  would  deem  reason- 
able an  agreement  with  an  unrelated  company  giving  the  same 
service  at  the  same  cost;  that  the  Wisconsin  company  could  not 
supply  the  equivalent  service  at  less  cost;  that  the  need  of  uni- 
formity and  standardization  were  great  and  securable  only  through 
a  central  company;  that  the  service  consisted  of  two  parts,  one 
relating  to  furnishing  and  repairing  the  subscribers'  talking 
instruments  and  the  other  to  engineering,  accounting,  legal, 
traffic  and  other  special  services.  The  annual  cost  of  this  4£ 
per  cent  payment  was  $1.45  per  telephone  —  60c.  properly  going 
to  use  and  repair  of  instruments,  22.2c.  for  construction  expense 
and  56.8c.  for  operation  and  plant  maintenance. 

The  Maryland  Commission  laid  great  stress  on  the  promotion 
and  financing  secured  by  the  subsidiary  in  exchange. 

American  Telephone-Rate  Examples.  —  The  classes  of  sub- 
scribers are  so  numerous  and  the  conditions  of  service  so  variable 
that  it  is  practically  impossible  to  present  an  illustrative  tabu- 
lation of  rates.  The  Census  Bureau  studied  the  possibility  of 
making  such  a  table  and  finally  selected  and  reprinted  the 
schedules  of  252  cities  —  occupying  106  pages  in  the  "  Report 
of  Census  on  Telegraphs  and  Telephones  for  1912,"  published 
in  1915. 

*  Bogart  v.  Wisconsin  Tel  Co.,  April,  1916,  P.  U.  R.  1916  C  104. 
t  Re  Chesapeake  &•  Potomac  Tel.  Co.,  Case  690,  March  8,  1916,  P.  U.  R 
1916  C  929. 


PROBABLE  APPROXIMATE  COST  OF  BRICK  BUILDINGS 

The  appended  diagrams  and  tables  were  first  prepared  by  Charles  T.  Main, 
Consulting  Engineer,  of  Boston,  for  appraising  brick  manufacturing  buildings 
and  estimating  on  proposed  structures.  They  were  revised  hi  1910  and 
printed  hi  Engineering  News,  Jan.  27,  1910.  The  figures  employed  represent 
an  average  cost  of  material  and  labor;  additions  and  deductions  are  required 
to  meet  special  conditions  and  changes  hi  prices. 

Thej  height  of  stories  is  assumed  to  be  13  feet  for  25  feet  width,  14  feet  for 
50  feet  width,  15  feet  for  75,  and  16  for  100  or  over.  The  construction  in- 
volved is  the  so-called  "  slow-burning  "  mill  type — 'brick  walls  with  heavy  timber 
floors  and  columns.  The  cost  of  brick  walls  (see  table)  is  based  on  22  bricks 
per  cubic  foot  costing  $18  per  M  laid.  Foundations  (see  table)  comprise  from 
5  per  cent  (for  large  buildings)  to  15  per  cent  (for  small  buildings)  of  the  total 
cost.  At  wall  openings,  40  {,  per  square  foot  was  allowed  for  windows,  doors 
and  sills.  Mill  floors  have  been  taken  at  32  £  per  square  foot,  which  figure  is 
based  on  $40  per  M  feet  B.  M.  for  southern-pine  timbers  and  $30  for  spruce 
planking.  Cost  of  ordinary  mill  roofs,  with  tar  and  gravel  cover,  has  been 
used  at  25 jf  per  square  foot.  Columns  added  6j5  per  square  foot  of  floor  area, 
for  columns  at  $15  each,  including  castings  and  piers. 

DATA  FOR  ESTIMATING  COST  OF  BUILDINGS 


Foundations 
Including  Excavations, 
Cost  per  Lin.  Ft. 

Brick  Walls,  Cost  per 
Sq.  Ft.  of  Surface 

Columns 
Including 
Piers  and 
Castings 

For  Out- 

For Inside 

Outside 

Inside 

Cost  of 

side  Walls 

Walls 

Walls 

Walls 

One 

One-story  building 

$2.00 

$1.75 

$0.40 

$0.40 

$15.00 

Two       ' 

2.90 

2.25 

0.44 

0.40 

15.00 

Three    ' 

3.80 

2.80 

0.47 

0.40 

15.00 

Four      ' 

4.70 

3.40 

0.50 

0.43 

15.00 

Five       ' 

5.60 

3.90 

0.53 

0.45 

15.00 

Six 

6.50 

4.50 

0.57 

0.47 

15.00 

Ordinary  plumbing  is  included  hi  the  costs  (two  fixtures  at  $75  each,  for  each 
floor  up  to  5000  square  feet,  and  one  fixture  for  each  additional  5000  square 
feet  or  fraction).  Cost  of  two  stairways  is  to  be  added  at  $100  per  flight,  and 
one  elevator  tower  for  buildings  up  to  150  feet  long;  two  stairways  and  two 
towers  for  buildings  150  to  300  feet  long.  For  incidentals  a  final  10  per  cent  is 
to  be  added. 

347 


348  PUBLIC  UTILITY  RATES 

The  following  modifications  were  recommended  by  Mr.  Main  in  1910. 

(a)  If  the  soil  is  poor  or  the  conditions  of  the  site  are  such  as  to  require  more 
than  the  ordinary  amount  of  foundations,  the  cost  will  be  increased. 

(6)  If  the  end  or  a  side  of  the  building  is  formed  by  another  building,  the 
cost  of  one  or  the  other  will  be  reduced  slightly. 

(c)  If  the  building  is  to  be  used  for  ordinary  storage  purposes  with  low 
stories  and  no  top  floors,  the  cost  will  be  decreased  from  about  10%  for  large 
low  buildings,  to  25%  for  small  high  ones,  about  20%  usually  being  a  fair 
allowance. 

(d)  If  the  buildings  are  to  be  used  for  manufacturing  purposes  and  are  to  be 
substantially  built  of  wood,  the  cost  will  be  decreased  from  about  6%  for  large 
one-story  buildings,  to  33%  for  high  small  buildings;  15%  would  usually  be  a 
fair  allowance. 

(e)  If  the  buildings  are  to  be  used  for  storage  with  low  stories  and  built  sub- 
stantially of  wood,  the  cost  will  be  decreased  from  13%  for  large  one-story 
buildings,  to  50%  for  small  high  buildings;   30%  would  usually  be  a  fair 
allowance.     The  cost  of  very  light  wooden  structures  is  much  less  than  the 
above  figures  would  give. 

(/)  If  the  total  floor  loads  are  more  than  75  pounds  per  square  foot  the  cost 
is  increased. 

(g)  For  office  buildings,  the  cost  must  be  increased  to  cover  architectural 
features  on  the  outside  and  interior  finish. 


APPENDIX  A 


349 


I  CO  TjH  1C  ' 

)  GOOD  00  ( 


l>l>-t^GOOOOOOOOOOOOOOO 


T  c<f  u  i>  c  u  c 


350 


PUBLIC  UTILITY  RATES 


The  diagrams,  of  course,  do  not  apply  to  the  abnormally  high  prices  prevail- 
ing from  1915  to  1917,  but  their  use  is  probably  justified  for  work  where  the 
value  sought  is  for  recent  normal  prices. 

The  various  prices  on  which  such  curves  may  be  based  are  stated  by  Mr. 
Main  as  follows: 


1903 

1907 

1916 

Excavation  (including  backfill),  per  cu.  yd. 

0  50 

Concrete  (including  forms),  per  cu.  yd.  .  .  . 

7  00 

Brickwork  in  walls,  per  M  

15  00 

18  00 

22  00 

Floors,  per  sq.  ft  

0  25 

0  32 

0  35 

Roofs,  per  sq.  ft  

0.20 

0  25 

0  30 

Window  openings,  wood  sash,  per  sq.  ft...  . 
Stairs,  including  partitions,  each  

0.33 
100  00 

0.40 
100  00 

0.67 
150  00 

Plumbing  sets;  fixtures,  piping  and  parti- 
tions, each  

75  00 

75  00 

100  00 

Columns;  southern  pine,  incl.  piers,  etc., 
each  

12  00 

15  00 

18  00 

nnnmiiiiiiiiiiiiim; 

!  IFIG,  3-Th 

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SIZE  COST  DIAGRAMS  FOR  BRICK  MILL  BUILDINGS 


(351) 


APPENDIX  B 

TABLES  FOR  SINKING-FUND  AND  PRESENT-VALUE 
COMPUTATIONS 

For  Annually  Compounded  Interest.  —  The  first  two  appended  tables 
(reprinted  from  Engineering  News,  Jan.  25,  1894)  were  prepared  by  John  W. 
Hill,  of  Cincinnati,  for  his  consulting  practice.  They  have  since  been  found  of 
great  use  to  engineers,  being  more  convenient  than  some  available  actuarial 
tables.  The  first  table  is  of  use  in  compound-interest  (sinking-fund)  compu- 
tations for  depreciation  and  retirance.  The  second  table  is  for  present  worths 
of  annual  charges.  The  third  table  shows  the  growth  of  depreciation  when  a 
definite  life  is  assumed  and  the  effect  of  interest  is  not  neglected. 


352 


APPENDIX  B 


353 


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354 


PUBLIC  UTILITY  RATES 


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APPENDIX  B 


355 


ECONOMIC  DEPRECIATION  AND  EARNING  CONDITION  OP  UTILITY  PHYSICAI/- 
PROPERTY  ITEMS  OF  DEFINITE  LIFE  AND  INTEREST  RATE  * 

Arranged  for  lives  of  from  5  to  50  years  and  for  interest  at  from  4  to  7 
per  cent.  Interest  annually  compounded.  "Depreciation"  is  that  during 
the  year  named;  "  Value  "  is  that  at  the  end  of  the  year. 

5- YEAR  LIFE. 


kg 

8><5 
«jl» 

Interest  Rate. 
4% 

Interest  Rate. 

5% 

Interest  Rate. 

6% 

Interest  Rate, 

?% 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

0 

100.0000 

100.0000 

100.0000 

100.0000 

18.4627 

18.0975 

17.7396 

17.3891 

1 

81.5373 

81.9025 

82.2604 

82.6109 

19.2012 

19.0023 

18.8041 

18.6063 

2 

62.3361 

62.9002 

63.4563 

64.0046 

19.9693 

19.9525 

19.9322 

19.9087 

3 

42.3668 

42.9477 

43.5241 

44.0959 

20.7680 

20.9501 

21.1282 

21.3024 

4 

21.5988 

21.9976 

22.3959 

22.7935 

21.5988 

21.9976 

22.3959 

22.7935 

5 

0.0000 

0.0000 

0.0000 

0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

10-  YEAR  LIFE. 

0 

100.0000 

100.0000 

100.0000 

100.0000 

8.3291 

7.9505 

7.5868 

7.2377 

i 

91.6709 

92.0495 

92.4132 

92.7623 

8.6623 

8.3480 

8.0420 

7.7444 

2 

83.0086 

83.7015 

84.3712 

85.0179 

9.0088 

8.7654 

8.5245 

8.2865 

3 

73.9998 

74.9361 

75.8467 

76.7314 

9.3690 

9.2037 

9.0360 

8.8666 

4 

64.6308 

65.7324 

66.8107 

67.8648 

9.7439 

9.6638 

9.5782 

9.4872 

5 

54.8869 

56.0686 

57.2325 

58.3776 

10.1336 

10.1470 

10.1528 

10.1513 

6 

44.7533 

45.9216 

47.0797 

48.2263 

10.5389 

10.6544 

10.7620 

10.8619 

7 

34.2144 

35.2672 

36.3177 

37.3644 

10.9606 

11.1871 

11.4078 

11.6223 

8 

23.2538 

24.0801 

24.9099 

25.7421 

11.3989 

11.7464 

12.0922 

12.4358 

9 

11.8549 

12.3337 

12.8177 

13.3063 

11.8549 

12.3337 

12.8177 

13.3063 

10 

0.0000 

0.0000 

0.0000 

0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

15-  YEAR  LIFE. 

0 

100.0000 

100.0000 

100.0000 

100.0000 

4.9941 

4.6342 

4.2963 

3.9795 

i 

95.0059 

95.3658 

95.7037 

96.0205 

5.1939 

4.8660 

4.5540 

4.2580 

2 

89.8120 

90.4998 

91.1497 

91.7625 

5.4016 

5.1092 

4.8273 

4.5561 

3 

84.4104 

85.3906 

86.3224 

87.2064 

5.6177 

5.3646 

5.1170 

4.8750 

4 

78.7927 

80.0260 

81.2054 

82.3314 

5.8424 

5.6330 

5.4239 

5.2162 

5 

72.9503 

74.3930 

75.7815 

77.1152 

6.0760 

5.9146 

5.7493 

5.5814 

6 

66.8743 

68.4784 

70.0322 

71.5338 

6.3192 

6.2103 

6.0944 

5.9722 

Embodying  the  compound-interest  depreciation  tables  of  the  Valuation  Committee  of  the 
American  Society  of  Civil  Engineers,  accompanying  its  1914  (progress)  and  1916  (final)  reports. 
See  the  Proceedings  of  the  American  Society  of  Civil  Engineers,  December  1916,  p.  1937.  The 
committee's  tables  go  to  100  years  life. 


356 


PUBLIC  UTILITY  RATES 


15- YEAR  LIFE. — (Continued.) 


*t 

0)  c8 

SK 

Interest  Rate. 

4% 

Interest  Rate. 
5% 

Interest  Rate. 

6% 

Interest  Rate. 

7% 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

7 

60.5551 

62.2681 

63.9878 

65.5616 

6.5719 

6.5209 

6.4601 

6.3901 

8 

53.9832 

55.7472 

57.4777 

59.1715 

6.8348 

6.8468 

6.8476 

6.8375 

9 

47.1484 

48.9004 

50.6301 

52.3340 

7.1081 

7.1892 

7.2584 

7.3160 

10 

40.0403 

41.7112 

43.3717 

45.0180 

7.3925 

7.5487 

7.6941 

7.8282 

11 

82.6478 

84.1625 

35.6776 

37.1898 

7.6882 

7.9261 

8.1555 

8.3762 

12 

24.9596 

26.2364 

27.5221 

28.8136 

7.9957 

8.3224 

8.6450 

8.9625 

IS 

16.9639 

17.9140 

18.8771 

19.8511 

8.3156 

8.7385 

9.1636 

9.5899 

14 

8.6483 

9.1755 

9.7135 

10.2612 

8.6483 

9.1755 

9.7135 

10.2612 

15 

0.0000 

0.0000 

0.0000 

0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

20-YEAR  LIFE. 

0 

100.0000 

100.0000 

100.0000 

100.0000 

3.3582 

3.0243 

2.7185 

2.4393 

1 

96.6418 

96.9757 

97.2815 

97.5607 

3.4925 

3.1755 

2.8815 

2.6100 

2 

93.1493 

93.8002 

94.4000 

94.9507 

8.6322 

3.3342 

3.0545 

2.7928 

3 

89.5171 

90.4660 

91.3455 

92.1579 

3.7775 

3.5010 

3.2377 

2.9882 

4 

85.7396 

86.9650 

88.1078 

89.1697 

3.9286 

3.6760 

3.4320 

3.1974 

5 

81.8110 

83.2890 

84.6758 

85.9723 

4.0857 

8.8598 

3.6379 

3.4213 

6 

77.7253 

79.4292 

81.0379 

82.5510 

4.2492 

4.0528 

3.8561 

3.6607 

7 

73.4761 

75.3764 

77.1818 

78.8903 

4.4191 

4.2554 

4.0876 

3.9169 

8 

69.0570 

71.1210 

73.0942 

74.9734 

4.5959 

4.4682 

4.3328 

4.1912 

9 

64.4611 

66.6528 

68.7614 

70.7822 

4.7797 

4.6916 

4.5928 

4.4845 

10 

59.6814 

61.9612 

64.1686 

66.2977 

4.9709 

4.9262 

4.8684 

4.7985 

11 

54.7105 

57.0350 

59.3002 

61.4992 

5.1698 

5.1725 

5.1604 

5.1348 

12 

49.5407 

51.8625 

54.1398 

56.3649 

5.3766 

5.4311 

5.4701 

5.4938 

13 

44.1641 

46.4314 

48.6697 

50.8711 

5.5916 

5.7027 

5.7982 

5.8783 

14 

88.5725 

40.7287 

42.8715 

44.9928 

5.8152 

5.9878 

6.1462 

6.2898 

15 

32.7573 

34.7409 

36.7253 

88.7030 

6.0479 

6.2872 

6.5149 

6.7301 

16 

26.7094 

28.4537 

80.2104 

81.9729 

6.2898 

6.6016 

6.9059 

7.2012 

17 

20.4196 

21.8521 

23.3045 

24.7717 

6.5414 

6.9817 

7.3202 

7.7052 

18 

13.8782 

14.9204 

15.9843 

17.0665 

6.8031 

7.8783 

7.7593 

8.2446 

19 

7.0751 

7.6421 

8.2250 

8.8219 

7.0741 

7.6421 

8.2250 

8.8219 

80 

0.0000 

0.0000 

0.0000 

0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

APPENDIX  B 


357 


25-YEAR  LIFE. 


•2  QQ 

fcjr  0) 

<»* 

Interest  Rate. 

4% 

Interest  Rate. 

5% 

-  Interest  Rate. 

6% 

Interest  Rate. 

7% 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

0 

100.0000 

100.0000 

100.0000 

100.0000 

2.4012 

2.0952 

1.8227 

1.5811 

1 

97.5988 

97.9048 

98.1773 

98.4189 

2.4972 

2.2001 

1.9320 

1.6917 

2 

95.1016 

95.7047 

96.2453 

96.7272 

2.5972 

2.3100 

2.0480 

1.8101 

3 

92.5044 

93.3947 

94.1973 

94.9171 

2.7010 

2.4254 

2.1708 

1.9369 

4 

89.8034 

90.9693 

92.0265 

92.9802 

2.8091 

2.5468 

2.3011 

2.0724 

5 

86.9943 

88.4225 

89.7254 

90.9078 

2.9214 

2.6742 

2.4391 

2.2175 

6 

84.0729 

85.7488 

87.2863 

88.6903 

8.0383 

2.8078 

2.5855 

2.8728 

7 

81.0346 

82.9405 

84.7008 

86.3175 

8.1598 

2.9482 

2.7406 

2.5388 

8 

77.8748 

79.9923 

81.9602 

83.7787 

3.2862 

8.0957 

2.9051 

2.7165 

9 

74.5886 

76.8966 

79.0551 

81.0622 

3.4176 

8.2504 

3.0794 

2.9067 

10 

71.1710 

73.6462 

75.9757 

78.1555 

8.5544 

3.4129 

3.2641 

3.1102 

11 

67.6166 

70.2333 

72.7116 

75.0453 

8.6965 

8.5886 

3.4600 

3.8279 

13 

63.9201 

66.6497 

69.2516 

71.7174 

3.8444 

3.7627 

3.6675 

3.5608 

13 

60.0757 

62.8870 

65.5841 

68.1566 

3.9982 

3.9509 

3.8877 

3.8101 

14 

56.0775 

58.9361 

61.6964 

64.3465 

4.1581 

4.1485 

4.1208 

4.0768 

15 

51.9194 

54.7876 

57.5756 

60.2697 

4.3244 

4.3559 

4.3682 

4.3622 

16 

47.5950 

50.4317 

53.2074 

55.9075 

4.4974 

4.5736 

4.6302 

4.6675 

17 

48.0976 

45.8581 

48.5772 

51.2400 

4.6773 

4.8024 

4.9081 

4.9942 

18 

88.4203 

41.0557 

43.6691 

46.2458 

4.8643 

5.0424 

5.2025 

5.3439 

19 

33.5560 

36.0133 

38.4666 

40.9019 

5.0590 

5.2946 

5.5147 

5.7179 

20 

28.4970 

30.7187 

32.9519 

35.1840 

5.2613 

5.5593 

5.8455 

6.1181 

21 

23.2357 

25.1594 

27.1064 

29.0659 

5.4718 

5.8373 

6.1963 

6.5465 

22 

17.7639 

19.3221 

20.9101 

22.5194 

5.6906 

6.1291 

6.5681 

7.0047 

23 

12.0733 

13.1930 

14.3420 

15.5147 

5.9183 

6.4356 

6.9621 

7.4950 

24 

6.1550 

6.7574 

7.3799 

8.0197 

6.1550 

6.7574 

7.3799 

8.0197 

25 

0.0000 

0.0000 

0.0000 

0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

30- YEAR  LIFE. 


0 

100.0000 

100.0000 

100.0000 

100.0000 

1.7830 

1.5051 

1.2649 

1.0586 

1 

98.2170 

98.4949 

98.7351 

98.9414 

1.8543 

1.6804 

1.3408 

1.1328 

2 

96.3627 

96.9145 

97.3943 

97.8086 

1.9285 

1.6595 

1.4212 

1.2120 

8 

94.4342 

95.2550 

95.9731 

96.5966 

2.0057 

1.7423 

1.5065 

1.2969 

358 


PUBLIC  UTILITY  RATES 


30-YEAR  LIFE. — (Continued.) 


3  oj 

CtCQ) 

•«* 

Interest  Rate. 
4% 

Interest  Rate. 

5% 

Interest  Rate. 

e% 

Interest  Rate. 

7% 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

4 

92.4285 

98.5127 

94.4666 

95.2997 

2.0859 

1.8296 

1.5969 

1.3877 

5 

90.8426 

91.6881 

92.8697 

93.9120 

2.1698 

1.9209 

1.6927 

1.4848 

6 

88.1788 

89.7622 

91.1770 

92.4272 

2.2560 

2.0171 

1.7948 

1.5887 

7 

85.9173 

87.7451 

89.8827 

90.8385 

2.3463 

2.1179 

1.9019 

1.6999 

8 

83.5710 

85.6272 

87.4808 

89.1386 

2.4402 

2.2238 

2.0161 

1.8190 

9 

81.1808 

83.4084 

85.4647 

87.8196 

2.5378 

2.3349 

2.1370 

1.9462 

10 

78.5980 

81.0685 

83.3277 

85.3734 

2.6893 

2.4518 

2.2652 

2.0825 

11 

75.9537 

78.6167 

81.0625 

83.2909 

2.7449 

2.5748 

2.4011 

2.2288 

12 

73.2088 

76.0424 

78.6614 

81.0626 

2.8545 

2.7030 

2.5452 

2.3843 

13 

70.8543 

73.3394 

76.1162 

78.6783 

2.9689 

2.8382 

2.6980 

2.5511 

14 

67.8854 

70.5012 

73.4182 

76.1272 

8.0877 

2.9800 

2.8597 

2.7297 

15 

64.2977 

67.5212 

70.5585 

73.8975 

8.2111 

8.1291 

8.0814 

2.9209 

16 

61.0866 

64.8921 

67.5271 

70.4766 

8.8395 

3.2856 

8.2133 

8.1254 

17 

57.7471 

61.1065 

64.3138 

67.8512 

8.4781 

3.4498 

8.4061 

8.3489 

18 

54.2740 

57.6567 

60.9077 

64.0078 

8.6121 

8.6223 

8.6104 

8.5782 

19 

50.6619 

54.0344 

57.2973 

60.4291 

3.7565 

8.8034 

3.8271 

8.8286 

20 

46.9054 

50.2810 

53.4702 

56.6005 

8.9068 

3.9936 

4.0566 

4.0966 

21 

42.9986 

46.2374 

49.4186 

52.5039 

4.0681 

4.1933 

4.8001 

4.8883 

22 

88.9855 

42.0441 

45.1135 

48.1206 

4.2256 

4.4029 

4.5581 

4.6902 

28 

84.7099 

87.6412 

40.5554 

48.4304 

4.3946 

4.6231 

4.8316 

5.0186 

24 

80.8153 

88.0181 

85.7288 

88.4118 

4.5704 

4.8543 

5.1214 

5.3698 

25 

25.7449 

28.1638 

80.6024 

33.0420 

4.7532 

5.0968 

5.4288 

5.7457 

26 

20.9917 

23.0670 

25.1786 

27.2963 

4.9483 

5.8519 

5.7544 

6.1479 

27 

16.0484 

17.7151 

19.4192 

21.1484 

6.1411 

5.6194 

6.0998 

6.5782 

28 

10.9078 

12.0957 

13.8194 

14.5702 

5.8467 

5.9005 

6.4657 

7.0887 

29 

5.5606 

6.1952 

6.8537 

7.5815 

5.5606 

6.1952 

6.8587 

7.5815 

80 

0.0000 

0.0000 

0.0000 

0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

100.0000 

100.0000 

100.0000 

100.0000 

35-YEAR  LIFE. 

0 

100.0000 

100.0000 

100.0000 

100.0000 

1.8577 

1.1072 

0.8974 

0.7234 

i 

98.6428 

98.8928 

99.1026 

99.2766 

1.4121 

1.1625 

0.9512 

0.7740 

2 

97.2802 

97.7308 

98.1514 

98.5026 

1.4685 

1.2207 

1.0083 

0.8283 

8 

95.7617 

96.5096 

97.1481 

97.6744 

1.5273 

1.2816 

1.0688 

0.8862 

APPENDIX  B 


359 


35-YEAR  LIFE. — (Continued.) 


5» 

& 

Interest  Rate. 

4% 

Interest  Rate. 

5% 

Interest  Rate. 
6% 

Interest  Rate. 

7o/o 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

4 

94.2344 

95.2280 

96.0743 

96.7882 

1.5884 

1.3458 

1.1329 

0.9488 

5 

92.6460 

93.8822 

94.9414 

95.8399 

1.6519 

1.4131 

1.2010 

1.0146 

6 

90.9941 

92.4691 

93.7404 

94.8253 

1.7179 

1.4837 

1.2729 

1.0856 

7 

89.2762 

90.9854 

92.4675 

93.7397 

1.7867 

1.5579 

1.3493 

1.1616 

8 

87.4895 

89.4275 

91.1182 

92.5781 

1.8581 

1.6358 

1.4303 

1.2429 

9 

85.6314 

87.7917 

89.6879 

91.3352 

1.9325 

1.7176 

1.5162 

1.3300 

10 

.  83.6989 

86.0741 

88.1717 

90.0052 

2.0098 

1.8035 

1.6071 

1.4230 

11 

81.6891 

84.2706 

86.5646 

88.5822 

2.0902 

1.8936 

1.7034 

1.5226 

12 

79.5989 

82.3770 

84.8612 

87.0596 

2.1737 

1.9883 

1.8058 

1.6298 

13 

77.4252 

80.3887 

83.0554 

85.4303 

2.2607 

2.0877 

1.9140 

1.7432 

14 

75.1645 

78.3010 

81.1414 

83.6871 

2.3512 

2.1922 

2.0289 

1.8653 

15 

72.8133 

76.1088 

79.1125 

81.8218 

2.4452 

2.8017' 

2.1506 

1.9959 

16 

70.3681 

78.8071 

76.9619 

79.8259 

2.5430 

2.4168 

2.2797 

2.1856 

17 

67.8251 

71.8903 

74.6822 

77.6903 

2.6447 

2.5377 

2.4165 

2.2851 

18 

65.1804 

68.8526 

72.2657 

75.4052 

2.7505 

2.6645 

2.5614 

2.4450 

19 

62.4299 

66.1881 

69.7043 

72.9602 

2.8605 

2.7978 

2.7152 

2.6163 

20 

59.5694 

63.8903 

66.9891 

70.3440 

2.9750 

2.9376 

2.8780 

2.7998 

21 

56.5944 

60.4527 

64.1111 

67.5447 

8.0939 

8.0845 

8.0507 

2.9958 

22 

53.5005 

57.3682 

61.0604 

64.5494 

3.2178 

8.2388 

3.2338 

8.2049 

23 

50.2827 

54.1294 

57.8266 

61.8445 

3.3464 

8.4007 

8.4278 

3.4298 

24 

46.9363 

50.7287 

54.8988 

57.9152 

8.4803 

8.5708 

3.6334 

3.6698 

25 

43.4560 

47.1579 

50.7654 

54.2459 

8.6195 

8.7492 

8.8515 

3.9262 

26 

39.8365 

43.4087 

46.9139 

50.8197 

3.7642 

3.9367 

4.0826 

4.2010 

27 

36.0723 

89.4720 

42.8313 

46.1197 

3.9149 

4.1837 

4.8275 

4.4951 

28 

32.1574 

85.8383 

38.5038 

41.6236 

4.0714 

4.8403 

4.5871 

4.8097 

29 

28.0860 

30.9980 

83.9167 

86.8139 

4.2343 

4.5572 

4.8624 

5.1464 

30 

23.8517 

26.4418 

29.0543 

81.6675 

4.4037 

4.7851 

5.1541 

5.5067 

31 

19.4480 

21.6557 

23.9002 

26.1608 

4.5798 

5.0244 

5.4684 

5.8923 

32 

14.8682 

16.6313 

18.4368 

20.2686 

4.7630 

5.2756 

5.7911 

6.3046 

33 

10.1052 

11.3557 

12.6457 

13.9640 

4.9535 

5.5394 

6.1887 

6.7458 

34 

5.1517 

5.8163 

6.5070 

7.2181 

5.1517 

5.8163 

6.5070 

7.2181 

85 

0.0000 

0.0000 

0.0000 

.    0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

360 


PUBLIC  UTILITY  RATES 


40- YEAR  LIFE. 


a  . 
™*  w 

~  u 

<U  o3 
60  4J 
<Ji* 

Interest  Rate. 

4% 

Interest  Rate. 

5% 

Interest  Rate. 
6% 

Interest  Rate. 

7% 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

0 

100.0000 

100.0000 

100.0000 

100.0000 

1.0524 

0.8278 

0.6462 

0.5009 

1 

98.9476 

99.1722 

99.3538 

99.4991 

1.0944 

0.8692 

0.6849 

0.5860 

3 

97.8532 

98.8030 

98.6689 

98.9631 

1.1882 

0.9127 

0.7260 

0.5785 

3 

96.7150 

97.8903 

97.9429 

98.8896 

1.1838 

0.9583 

0.7696 

0.6186 

4 

95.5312 

96.4820 

97.1788 

97.7760 

1.2311 

1.0062 

0.8157 

0.6566 

5 

94.3001 

95.4258 

96.8576 

97.1194 

1.2803 

1.0565 

0.8647 

0.7026 

6 

93.0198 

94.8693 

95.4929 

96.4168 

1.3316 

1.1098 

0.9166 

0.7517 

r 

91.6882 

98.2600 

94.5768 

95.6651 

1.8848 

1.1648 

0.9716 

0.8044 

8 

90.8034 

92.0952 

98.6047 

94.8607 

1.4402 

1.2230 

1.0299 

0.8606 

9 

88.8682 

90.8722 

92.5748 

94.0001 

1.4978 

1.2842 

1.0916 

0.9210 

10 

87.8654 

89.5880 

91.4832 

98.0791 

1.5577 

1.3484 

1.1572 

0.9858 

11 

85.8077 

88.2396 

90.3260 

92.0938 

1.6201 

1.4158 

1.2266 

1.0544 

12 

84.1876 

86.8288 

89.0994 

91.0394 

1.6848 

1.4866 

1.8002 

1.1281 

13 

82.5028 

85.8872 

87.7992 

89.9118 

1.7523 

1.5610 

1.8782 

1.2071 

14 

80.7505 

88.7762 

86.4210 

88.7042 

1.8223 

1.6890 

1.4309 

1.2917 

15 

78.9282 

82.1872 

84.9601 

87.4125 

1.8952 

1.7210 

1.5485 

1.3820 

16 

77.0880 

80.4162 

83.4116 

86.0304 

1.9710 

1.8070 

1.6415 

1.4788 

17 

75.0620 

78.6092 

81.7701 

84.5517 

2.0499 

1.8974 

1.7899 

1.5828 

18 

73.0121 

76.7118 

80.0302 

82.9694 

2.1819 

1.9923 

1.8443 

1.6930 

19 

70.8802 

74.7195 

78.1859 

81.2764 

2.2171 

2.0919 

1.9550 

1.8116 

20 

68.6631 

72.6276 

76.2309 

79.4648 

2.3059 

2.1965 

2.0724 

1.9884 

21 

66.3572 

70.4311 

74.1585 

77.5264 

2.8980 

2.3068 

2.1966 

2.0741 

22 

68.9592 

68.1248 

71.9619 

75.4523 

2.4940 

2.4216 

2.3284 

2.2192 

28 

61.4652 

65.7032 

69.6335 

73.2331 

2.5937 

2.5427 

2.4682 

2.8746 

24 

58.8715 

63.1605 

67.1658 

70.8585 

2.6975 

2.6698 

2.6162 

2.5408 

25 

56.1740 

60.4907 

64.5491 

68.3177 

2.8054 

2.8033 

2.7782 

2.7187 

26 

53.8686 

57.6874 

61.7759 

65.5990 

2.9176 

2.9434 

2.9896 

2.9090 

27 

50.4510 

54.7440 

58.8363 

62.6900 

3.0843 

3.0906 

3.1160 

3.1126 

28 

47.4167 

51.6584 

55.7203 

59.5774 

8.1557 

8.2451 

3.8029 

3.8305 

29 

44.2610 

48.4088 

52.4174 

56.2469 

8.2819 

3.4074 

3.6011 

3.5636 

80 

40.9791 

45.0009 

48.9163 

52.6838 

3.4132 

3.5778 

8.7112 

3.8131 

81 

87.5659 

41.4231 

45.2051 

48.8702 

3.5498 

3.7567 

8.9389 

4.0800 

82 

84.0161 

37.6664 

41.2712 

44.7902 

3.6916 

3.9445 

4.1699 

4.8656 

APPENDIX  B 


361 


40- YEAR  LIFE. — (Continued.) 


3* 

s| 

«^t» 

Interest  Rate. 
4% 

Interest  Rate. 

5% 

Interest  Rate. 

6% 

Interest  Rate. 

7% 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

83 

30.3245 

33.7219 

37.1013 

40.4246 

3.8393 

4.1417 

4.4200 

4.6712 

34 

26.4852 

29.5802 

32.6813 

35.7534 

8.9930 

4.3488 

4.6853 

4.9982 

35 

22.4922 

25.2314 

27.9960 

30.7552 

4.1526 

4.5662 

4.9664 

5.8480 

36 

18.3396 

20.6652 

23.0296 

25.4072 

4.3189 

4.794ft 

5.2644 

5.7225 

87 

14.0207 

15.8706 

17.7652 

19.6847 

4.4915 

5.0343 

5.5802 

6.1229 

88 

9.5292 

10.8363 

12.1850 

13.5618 

4.6712 

5.2860 

5.9151 

6.5516 

39 

4.8580 

5.5503 

6.S699 

7.0102 

4.8580 

5.5503 

6.2699 

7.0102 

40 

0.0000 

0.0000 

0.0000 

0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

45-  YEAR  LIFE. 

0 

100.0000 

100.0000 

100.0000 

100.0000 

0.8262 

0.6262 

0.4700 

0.8500 

i 

99.1738 

99.8738 

99.5300 

99.5600 

0.8593 

0.6575 

0.4983 

0.8744 

2 

98.8145 

98.7163 

99.0317 

99.2756 

0.8937 

0.6903 

0.5283 

0.4007 

3 

97.4208 

98.0260 

98.5034 

98.8749 

0.9294 

0.7249 

0.5597 

0.4287 

4 

96.4914 

97.3011 

97.9437 

98.4462 

0.9666 

0.7611 

0.5934 

0.4587 

5 

95.6248 

96.5400 

97.3503 

97.9875 

1.0053 

0.7992 

0.6290 

0.4908 

6 

94.5195 

95.7408 

96.7218 

97.4967 

1.0455 

0,8392 

0.6668 

0.5252 

7 

93.4740 

94.9016 

96.0545 

96.9715 

1.0872 

0.8810 

0.7068 

0.5620 

8^ 

92.3868 

94.0206 

95.8477 

96.4095 

1.1808 

0.9251 

0.7492 

0.6018 

9 

91.2560 

93.0955 

94.5985 

95.8082 

1.1760 

0.9714 

0.7941 

0.6434 

10 

90.0800 

92.1241 

93.8044 

95.1648 

1.2230 

1.0200 

0.8418 

0.6884 

11 

88.8570 

91.1041 

92.9626 

94.4764 

1.2720 

1.0710 

0.8923 

0.7366 

12 

87.5850 

90.0311 

92.0708 

93.7398 

1.3229 

1.1245 

0.9459 

0.7882 

13 

86.2621 

88.9086 

91.1244 

92.9516 

1.3757 

1.1807 

1.0025 

0.8433 

14 

84.8864 

87.7279 

90.1219 

92.1083 

1.4308 

1.2398 

1.0628 

0.9024 

15 

83.4556 

86.4881 

89.0591 

91.2059 

1.4880 

1.3018 

1.1265 

0.9655 

16 

81.9676 

85.1863 

87.9326 

90.2404 

1.5476 

1.3668 

1.1941 

1.0331 

17 

80.4200 

83.8195 

86.7385 

89.2073 

1.6094 

1.4352 

1.2657 

1.1055 

18 

78.8106 

82.3843 

85.4728 

88.1018 

1.6738 

1.5070 

1.3417 

1.1828 

19 

77.1368 

80.8773 

84.1311 

86.9190 

1.7408 

1.5823 

1.4222 

1.2657 

20 

75.8960 

79.2950 

82.7089 

85.6533 

1.8104 

1.6614 

1.5075 

1.3542 

81 

73.5856 

77.6336 

81.2014 

84.2991 

1.8828 

1.7445 

1.5979 

1.4490 

362 


PUBLIC  UTILITY  RATES 


45- YEAR  LIFE. — (Continued.) 


a, 

f«9 
g 
7 

Interest  Rate. 
4% 

Interest  Rate. 

5% 

Interest  Rate. 

6% 

Interest  Rate. 

7% 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

89 

71.7028 

75.8891 

79.6035 

82.8501 

1.9581 

1.8317 

1.6989 

i.5504 

28 

69.7447 

74.0574 

77.9096 

81.2997 

2.0365 

1.9233 

1.7954 

1.6590 

24 

67.7082 

72.1341 

76.1142 

79.6407 

2.1180 

2.0195 

1.9033 

1.7751 

25 

65.5902 

70.1146 

74.2109 

77.8656 

2.2026 

2.1205 

2.0174 

1.8994 

26 

63.3876 

67.9941 

72.1935 

75.9662 

2.2907 

2.2264 

2.1383 

2.0828 

27 

61.0969 

65.7677 

70.0552 

78.9339 

2.3824 

2.8378 

2.2668 

2.1746 

28 

58.7145 

63.4299 

67.7884 

71.7598 

2.4777 

2.4548 

2.4028 

2.8268 

29 

56.2368 

60.9751 

65.3856 

69.4325 

2.5768 

2.5773 

2.5469 

2.4897 

30 

53.6600 

58.3978 

62.8387 

66.9428 

2.6798 

2.7062 

2.6997 

2.6640 

31 

50.9802 

55.6916 

60.1890 

64.2788 

2.7870 

2.8417 

2.8617 

2.8504 

32 

48.1932 

52.8499 

57.2773 

61.4284 

2.8986 

2.9837 

3.0384 

3.0499 

33 

45.2946 

49.8662 

54.2489 

58.8785 

3.0144 

3.1328 

8.2155 

3.2686 

34 

42.2802 

46.7334 

51.0284 

55.1150 

3.1350 

3.2896 

8.4083 

8.4920 

85 

39.1452 

43.4438 

47.6201 

5.1.6230 

3.2605 

8.4539 

8.6129 

3.7363 

36 

35.8847 

89.9899 

44.0072 

47.8867 

3.3909 

8.6267 

8.8296 

3.9979 

87 

82.4938 

36.3632 

40.1776 

43.8888 

3.5264 

8.8081 

4.0594 

4.2777 

38 

28.9674 

82.5551 

86.1182 

89.6111 

3.6676 

3.9983 

4.3029 

4.5772 

39 

25.2998 

28.5568 

31.8153 

85.0339 

3.8142 

4.1984 

4.5612 

4.8976 

40 

21.4856 

24.3584 

27.2541 

80.1363 

3.9669 

4.4083 

4.8348 

5.2404 

41 

17.5187 

19.9501 

22.4193 

24.8959 

4.1255 

4.6286 

5.1249 

6.6078 

42 

13.3932 

15.8215 

17.2944 

19.2886 

4.2905 

4.8600 

5.4323 

5.9997 

48 

9.1027 

10.4615 

11.8621 

13.2889 

4.4621 

5.1032 

5.7584 

6.4197 

44 

4.6406 

6.3583 

6.1037 

6.8692 

4.6406 

5.3583 

6.1037 

6.8692 

45 

0.0000 

0.0000 

0.0000 

0.0000 

. 

100.0000 

100.0000 

100.0000 

100.0000 

50-YEAR  LIFE. 


0 

100.0000 

100.0000 

100.0000 

100.0000 

0.6550 

0.4777 

0.3444 

0.2460 

1 

99.3450 

99.5223 

99.6556 

99.7540 

0.6812 

0.5015 

.  0.8651 

0.2682 

2 

98.6638 

99.0208 

99.2905 

99.4908 

0.7085 

0.5267 

0.3870 

0.2816 

8 

97.9553 

98.4941 

98.9035 

99.2092 

0.7368 

0.5529 

0.4102 

0.8014 

4 

97.2185 

97.9412 

98.4983 

98.9078 

0.7663 

0.5806 

0.4349 

0.8224 

6 

96.4522 

97.3606 

98.0584 

98.5854 

0.7969 

0.6097 

0.4609 

0.8450 

APPENDIX  B 


363 


50- YEAR  LIFE. — (Continued.) 


«» 

-  ^ 
<B  OS 

jf& 

Interest  Rate. 

4% 

Interest  Rate. 

5% 

Interest  Rate. 
6% 

Interest  Rate. 

7% 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

Value. 

Dep. 

6 

95.6558 

96.7509 

97.5975 

98.2404 

0.8288 

0.6401 

0.4886 

0.3692 

7 

94.8265 

96.1108 

97.1089 

97.8712 

0.8620 

0.6722 

0.5179 

0.8950 

8 

93.9645 

95.4386 

96.5910 

97.4762 

0.8964 

0.7057 

0.5489 

0.4226 

9 

93.0681 

94.7329 

96.0421 

97.0536 

0.9823 

0.7410 

0.5819 

0.4522 

10 

92.1358 

93.9919 

95.4602 

96.6014 

0.9696 

0.7781 

0.6169 

0.4839 

tl 

91.1662 

93.2138 

94.8433 

96.1175 

1.0084 

0.8170 

0.6538 

0.5178 

12 

90.1578 

• 

92.3968 

94.1895 

95.5997 

1.0487 

0.8578 

0.6931 

0.5540 

IS 

89.1091 

91.5390 

93.4964 

95.0457 

1.0906 

0.9008 

0.7346 

0.5928 

14 

88.0185 

90.6382 

92.7618 

94.4529 

1.1343 

0.9457 

0.7787 

0.6343 

15 

86.8842 

89.6925 

91.9831 

93.8186 

1.1797 

0.9931 

0.8255 

0.6786 

16 

85.7045 

88.6994 

91.1576 

93.1400 

1.2268 

1.0427 

0.8749 

0.7262 

17 

84.4777 

87.6567 

90.2827 

92.4138 

1.2759 

1.0948 

0.9275 

0.7771 

18 

83.2018 

86.5619 

89.3552 

91.6367 

1.3270 

1.1496 

0.9831 

0.8314 

19 

81.8748 

85.4123 

88.3721 

90.8053 

1.3800 

1.2071 

1.0421 

0.8896 

20 

80.4948 

84.2052 

87.3300 

89.9157 

1.4353 

1.2674 

1.1046 

0.9519 

21 

79.0595 

82.9378 

86.2254 

88.9638 

1.4926 

1.3307 

1.1710 

1.0185 

22 

77.5669 

81.6017 

85.0544 

87.9453 

1.5523 

1.3974 

1.2411 

1.0898 

23 

76.0146 

80.2097 

83.8133 

86.8555 

1.6144 

1.4672 

1.8156 

1.1661 

24 

74.4002 

78.7425 

82.4977 

85.6894 

1.6791 

1.5405 

1.3946 

1.2477 

25 

72.7211 

77.2020 

81.1031 

84.4417 

1.7461 

1.6176 

1.4782 

1.3351 

26 

70.9750 

75.5844 

79.6249 

83.1066 

1.8161 

1.6984 

1.5670 

1.4285 

27 

69.1589 

73.8860 

78.0579 

81.6781 

1.8887 

1.7834 

1.6610 

1.5285 

28 

67.2702 

72.1026 

76.3969 

80.1496 

1.9642 

1.8726 

1.7606 

1.6355 

29 

65.3060 

70.2300 

74.6368 

78.6141 

2.0427 

1.9661 

1.8662 

1.7500 

80 

63.2633 

68.2639 

72.7701 

76.7641 

2.1245 

2.0645 

1.9783 

1.8725 

31 

61.1388 

66.1994 

70.7918 

74.8916 

2.2095 

2.1677 

2.0969 

2.0036 

82 

58.9293 

64.0317 

68.6949 

72.8880 

2.2979 

2.2761 

2.2227 

2.1438 

83 

56.6314 

61.7556 

66.4722 

70.7442 

2.3897 

2.3899 

2.3561 

2.2939 

34 

54.2417 

59.3657 

64.1161 

68.4503 

2.4854 

2.5095 

2.4975 

2.4545 

35 

51.7563 

56.8562 

61.6186 

65.9958 

2.5847 

2.6847 

2.6473 

2.6263 

86 

49.1716 

54.2215 

58.9713 

63.3695 

2.6882 

2.7666 

2.8061 

2.8101 

37 

46.4834 

51.4549 

56.1652 

60.5594 

2.7957 

2.9056 

2.9745 

3.0068 

88 

48.6877 

48.5499 

53.1907 

57.5526 

2.9075 

3.0501 

3.1530 

3.2173 

364 


PUBLIC  UTILITY  RATES 


50-YEAR  LIFE. — (Continued.) 


52 
«« 

$Z 

Interest  Rate. 
4% 

Interest  Rate. 
6% 

Interest  Rate. 
6% 

Interest  Rate. 

7% 

Value. 

Dep. 

Value. 

Dep.  - 

Value. 

Dep. 

Value. 

Dep. 

89 

40.7802 

45.4998 

50.0877 

54.3353 

3.0238 

3.2027 

8.8422 

3.4425 

40 

87.7564 

42.2971 

46.6955 

50.8928 

3.1448 

3.3629 

3.5427 

3.6835 

41 

84.6116 

38.9342 

43.1528 

47.2093 

3.2?06 

3.5309 

3.7553 

3.9414 

42 

31.3410 

85.4033 

89.3975 

43.2679 

3.4013 

3.7075 

8.9805 

4.2172 

48 

27.9397 

31.6958 

35.4170 

39.0507 

3.5375 

3.8929 

4.2194 

4.5124 

44 

24.4022 

27.8029 

31.1976 

84.5388 

3.6789 

4.0875 

4.4726 

4.8284 

45 

20.7233 

23.7154 

26.7250 

29.7099 

3.8261 

4.2919 

4.7410 

5.1662 

43 

16.8972 

19.4235 

21.9840 

24.5437 

3.9791 

4.5065 

5.0253 

5.5280 

47 

12.9181 

14.9170 

16.9587 

19.0157 

4.1383 

4.7319 

5.8270 

5.9149 

48 

8.7798 

10.1851 

11.6317 

13.1008 

4.3038 

4.9683 

5.6465 

6.3289 

49 

4.4760 

5.2168 

5.9852 

6.7719 

4.4760 

5.2168 

5.9852 

6.7719 

50 

0.0000 

0.0000 

0.0000 

0.0000 

100.0000 

100.0000 

100.0000 

100.0000 

APPENDIX  B 


365 


Sinking  Fund  and  Present  Worth  Formulas.  —  If  V  is  the  fund  to  be 
accumulated  after  n  years  by  investing  the  annuity  x  at  the  annually  com- 
pounded interest  rate  r  (expressed  as  a  decimal);  and  if  W  is  the  present 
worth  of  an  annuity  y  —  or  the  sum  which,  if  placed  at  compound  interest  r 
will  provide  a  given  annuity. y  for  n  years  before  it  is  used  up  —  then: 


x  =  V 


(1+r)"-!'. 
s[(l+r)n  -1] 
~~ 


W  = 


Where  DI  =  loss  of  value  after  I  years  and  n  =  years  length  of  assumed  life: 

(1  +  r)*  -  1 
(l+r)"-l' 

For  Semi-annually  Compounded  Interest.  —  The  accompanying  table 
shows  a  sinking  fund  table  by  Peter  Mogensen,  first  printed  in  Engineering 
News,  Oct.  21,  1897,  and  based  on  semi-annual  compounding  of  interest.  The 


formula  for  computation  was  x  = 
plus  a  half  year's  interest  added. 


V  (s2  -  1) 


where  the  new  quantity  s  is  $1 


ANNUAL  PAYMENTS  TO  A  SINKING  FUND  NECESSARY  TO  ACCUMULATE 
ONE  DOLLAR  AT  THE  END  OF  A  GIVEN  NUMBER  OP  YEARS 


Int.  Per 
Ann." 

l% 

2% 

3% 

4% 

5% 

6% 

7% 

8% 

9% 

10% 

X 

1.005 

1.010 

1.015 

1.020 

1.025 

1.030 

1.035 

1.040 

1.045 

1.050 

2 

0.4975 

0.4951 

0.4923 

0.4903 

0.4877 

0.4853 

0.4829 

0.4803 

0.4781 

0.4756 

3 

0.3298 

0.3262 

0.3235 

0.3199 

0.3170 

0.3138 

0.3106 

0.3076 

0.3044 

0.3014 

4 

0.2463 

0.2425 

0.2389 

0.2353 

0.2318 

0.2283 

0.2248 

0.2214 

0.2180 

0.2147 

5 

0.1953 

0.1916 

0.1881 

0.1845 

0.1807 

0.1771 

0.1734 

0.1699 

0.1664 

0.1630 

6 

0.1625 

0.1585 

0.1545 

0.1506 

0.1468 

0.1431 

0.1394 

0.1358 

0.1322 

0.1288 

7 

0.1387 

0.1345 

0.1304 

0.1265 

0.1226 

0.1188 

0.1151 

0.1115 

0.1080 

0.1046 

8 

0.1206 

0.1165 

0.1124 

0.1084 

0.1045 

0.1007 

0.0970 

0.0935 

0.0900 

0.0867 

9 

0.1061 

0.1025 

0.0983 

0.0943 

0.0904 

0.0867 

0.0831 

0.0795 

0.0761 

0.0729 

10 

0.0953 

0.0913 

0.0871 

0.0832 

0.0793 

0.0755 

0.0719 

0.0685 

0.0652 

0.0620 

12 

0.0788 

0.0745 

0.0704 

0.0664 

0.0626 

0.0590 

0.0555 

0.0522 

0.0491 

0.0461 

15 

0.0620 

0.0577 

0.0537 

0.0498 

0.0462 

0.0427 

0.0394 

0.0363 

0.0335 

0.0308 

20 

0.0453 

0.0411 

0.0371 

0.0334 

0.0300 

0.0269 

0.0241 

0.0215 

0.0191 

0.0170 

25 

0.0353 

0.0311 

0.0273 

0.0239 

0.0208 

0.0179 

0.0155 

0.0133 

0.0114 

0.0098 

30 

0.0287 

0.0246 

0.0209 

0.0177 

0.0149 

0.0124 

0.0104 

0.0086 

0.0071 

0.0058 

35 

0.0239 

0.0199 

0.0165 

0.0135 

0.0109 

0.0087 

0.0070 

0.0056 

0.0044 

0.0035 

40 

0.0204 

0.0165 

0.0132 

0.0104 

0.0082 

0.0062 

0.0048 

0.0037 

0.0028 

0.0021 

45 

0.0177 

0.0139 

0.0107 

0.0082 

0.0062 

0.0046 

0.0034 

0.0025 

0.0018 

0.0013 

50 

0.0154 

0.0118 

0.0088 

0.0064 

0.0047 

0.0032 

0.0024 

0.0016 

0.0011 

0.0008 

60 

0.0122 

0.0087 

0.0060 

0.0041 

0.0028 

0.0018 

0.0012 

0.0007 

0.0005 

0.0003 

70 

0.0099 

0.0065 

0.0043 

0.0028 

0.0017 

0.0009 

0.0006 

0.0003 

0.0002 

0.0001 

80 

0.0082 

0.0051 

0.0031 

0.0018 

0.0010 

0.0005 

0.0003 

0.0001 

0.0001 

0.0000 

100 

0.0059 

0.0032 

0.0016 

0.0008 

0.0004 

0.0002 

0.0001 

0.0000 

0.0000 

0.0000 

APPENDIX  C 


TYPICAL  LIFE  EXPECTATION  TABLES  FOR  PUBLIC- 
UTILITY  PROPERTY 

TYPICAL,  LIFE-EXPECTATION  FIGURES  FOR  PUBLIC-UTILITY  PROPERTY 


Years 

Authority  * 

Control  t 

Railways 
Bridges,  steel  

20-50 

* 

Obs. 

wood  

10 

* 

Det. 

Buildings,  office,  masonry.       .   . 

70 

* 

Obs 

dwellings,  etc.,  wood-frame. 

30 
40 

* 
* 

Obs.  or  Det. 
Obs 

wood  

20 

* 

Obs. 

shops,  first  class  

75 

Wis.  R.  R.  Comm. 

Obs. 

second  class  

50 

Wis.  R.  R.  Comm. 

Det. 

sheds,  wood-frame  

20 

* 

Det. 

Cars,  freight,  wood      

10-20 

* 

Det 

steel  •.  

15-30 

* 

Det. 

passenger,  wood  

20-25 

* 

Obs. 

steel  

25-30 

* 

Det. 

dining,  parlor  and  sleeping,  wood 
steel 
Locomotives,  freight 

15-20 
20-25 
15-20 

* 

* 
* 

Obs. 
Obs. 
Det  (1  000  000m.) 

passenger  

15-20 

* 

Det.(l,000,000m.) 

switching  

20 

* 

Det. 

Signals  

30 

* 

Obs. 

Track,  rail,  main-line  tangent     .   . 

2-8 

* 

Det.  and  Obs.t 

1-5 

* 

Det  and  Obs.  J 

sidings  and  yards  

10-20 

* 

Det.t 

ties,  ordinary  light  wood  

5-10 

* 

Det. 

ordinary  hard  wood  ... 

10-15 

* 

Det. 

treated  and  protected  

30 

* 

Det. 

Electric  Railways 
Bridges  (see  Railways) 
Cars  

30 

B.  J.  Arnold 

Det. 

Car  bodies,  open-type  

25 

Chicago  Trac.  Val.  Comm. 

Det. 

closed-type  

20 

Det. 

trucks  

30 

.<            «        .•          « 

Det. 

motors  

5 

Wis.  R.  R.  Comm.;  H.  Floy 

Det. 

misc.  elec.  equipment.  

10-15 

* 

Det. 

*  Where  no  authority  is  cited  the  data  are  those  of  the  author  —  average  or  approximate  figures 
secured  by  examination  or  enquiry. 

t  Probable  action  limiting  service  life;  deterioration  (due  to  wear  and  tear  and  weathering) 
and  obsoletion.  Where  both  are  cited,  both  actions  have  been  observed,  the  first  named  pre- 
dominating in  a  majority  of  cases.  , 

t  Main-line  rail  is  removed  after  5  to  10%  reduction  of  weight,  and  is  used  as  relayer  rail  on  less 
important  service  like  sidings  and  branches.  Here  it  is  good  for  many  years  of  service.  The  wear 
on  level  main-line  tangent  rail  is  in  the  order  of  1.3%  per  year  per  100,000,000  tons  passage  over  it. 
This  wear  probably  increases  by  an  extra  0.1%  per  1%  grade  and  by  0.3%  extra  per  1  degree  curva- 
ture. 

366 


APPENDIX  C 


367 


TYPICAL  LIFE-EXPECTATION  FIGURES  FOB  PUBLIC-UTILITY 
PROPERTY.  —  Continued 


fears 

Authority  * 

Control  f 

Slectric  Railways 

30-50 

Wis.  R.  R.  Comm. 

Obs. 

10-15 

Det. 

Overhead  construction,  trolley  wire, 
No.  0,  1  min.  headway  

2 

Wis.  R.  R.  Comm. 

Overhead  construction,  trolley  wire, 

2j 

Det.  Reduced 

Overhead  construction,  trolley  wire, 
No.  000,  1  min.  headway  

3 

Wis.  R.R.  Comm. 

Overhead  construction,  single-catenary 
support  

15-20 

* 

Det. 

Overhead   construction,    double-eate- 

20-25 

* 

Det. 

Overhead  construction,  cross  spans  and 
brackets  

15-20 

Wis.  R.  R.  Comm. 

Det. 

14 

Wis.  R.  R.  Comm. 

Det. 

20 

Det. 

iron  or  steel  

40 

,. 

Det. 

Power  station  equipment   (see  Elec- 
tricity-supply Works) 

18 

Wis.  R.  R.  Comm. 

Det. 

curves  

5 

* 

Det. 

5 

* 

Det. 

Trestles  (see  Railways) 

Water-works 
Buildings,  masonry  

40-50 

L.  Metcalf 

Obs. 

wood-frame          

20-50 

Det. 

12-16 

i, 

Det. 

water-tube  

20-30 

Wis.  R.  R.  Comm. 

Det. 

Filter  beds          

30-50 

Obs. 

Hydrants  

40-50 

L.  Metcalf 

Det. 

Mains,  large  cast-iron  (6  in.  and  over)  . 
small  cast-iron  (4  in.  and  under) 
steel     

20-40 
50-75 
15-50 

Obs. 
Obs. 
Det. 

wood  

30-50 

Wis.  R.  R.  Comm. 

Det. 

Meters  

20-30 

L.  Metcalf 

Det. 

Pumps  and  engines  .  .        

20-30 

Det. 

20-25 

Wis.  R.  R.  Comm. 

Det. 

triplex  

20-30 

Det. 

crank  and  flywhee 
centrifugal 

Reservoirs  

30-40 
20-30 

50-100 

|  L.  Metcalf                           1 

Obs.  and  Det. 
Det. 

Obs. 

Standpipes  

30-50 

|  Wis.  R.  R.  Comm.             j 
L.  Metcalf 

Det. 

Service  pipes,  lead  

50-100 

Wis.  R.  R.  Comm. 

Det.  and  Obs. 

galvanized  iron  or  steel  .  . 
Suctions  and  intakes          

30-50 
30-50 

Det. 
Det.  and  Obs. 

Valves  

40-50 

L.  Metcalf 

Det. 

Wells,  driven  or  drilled  

50-75 

Wis.  R.  R.  Comm. 

Det. 

open  and  lined  

75-100 

Obs. 

Gas  Works 
Blowers  .'  

15 

Wis.  R.  R.  Comm. 

Det. 

Ammonia  concentrators  

15 

Det. 

368 


PUBLIC  UTILITY  RATES 


TYPICAL  LIFE-EXPECTATION  FIGURES  FOR 
PROPERTY  .  —  Continued 


Years 

Authority  * 

Control  f 

Gas  Works 
Ammonia  storage  tanks  

15 

Wis.  R.  R.  Conim. 

Dot 

25 

Det 

25 

«         «           .< 

Det 

Gas  holders  

50 

.1 

Obs.  and  Det. 

Governors  

50 

•>         .<           •• 

Det.  and  Obs 

Mains,  small  cast-iron  (4  in.  and  under] 
Mains,  large  cast-iron  (6  in.  and  over) 
small  steel  or  iron  (3  in.  and 
under)  

50 
75 

20 

Wis.  R.  R.  Comm. 

Obs. 
Obs. 

Det 

large  steel  or  iron  (above  3  in.)  . 

30 
50 

'  

Det. 
Obs 

drums      "      

20 

Det. 

Meters  and  governors  (consumer's)  .... 
Purifiers  

25 
50 

"         "           " 

Det. 
Obs 

Scrubbers  and  condensers  

30 

«         ..           « 

Det 

20 

..         «           .. 

Det 

50 

<•         •<           .. 

Obs 

extractor  

40 

«           « 

Obs 

Water-gas  machines  

30 

Det. 

Electricity-supply  Works 

10-20 

Wis.  R.  R  Comm 

Det 

Arc  lamps  and  hangings  

10-15 

{Wis.  R.  R.  Comm.            1 

Det.  and  Obs. 

Belting  

20-25 

St.  Louis  P.  S.  Comm.      J 
Wis.  R.  R.  Comm. 

Det 

Boilers,  fire-tube            

10-15 

Det 

water-tube  

20-30 

<. 

Det. 

Buildings,  masonry  

75 

«         ..           « 

Obs. 

wood-frame  or  second  class 
Chimneys  and  stacks,  masonry  

50 
30 

* 

Det.  and  Obs. 
Obs 

steel  

10 

* 

Det 

Condensers  

20-30 

jwis.  R.  R.  Comm.             1 

Det. 

Conduits  and  manholes  

30-50 

[Chicago  Trac.  Val.  Comm.J 
Wis.  R.  R.  Comm. 

Obs. 

10 

Det 

ash  or  combined  coal  and 

fvh    -.,,,,,,,.,,,    . 

5 

* 

Det 

Cross  arms  

10-15 

Wis.  R.  R.  Comm. 

Det. 

Engines,  gas  

10-15 

Det.  and  Obs. 

steam,  high-speed  

15-20 

••        •<          ., 

Det. 

steam,  slow-speed  

25-30 

.<        ..          it 

Det.  and  Obs. 

Feed-  water  heaters  

20-30 

..        «          <• 

Det 

Fuse  boxes  

10-12 

«         .1          .. 

Det. 

Fuel-oil  equipment  

25 

Chicago  Trac.  Val.  Comm. 

Det. 

Generators,  motors  and  converters 
high-speed  

15 

* 

Det. 

slow-speed  

20 

* 

Obs. 

new  types       

20 

Wis.  R.  R.  Comm. 

Det. 

old  types    

15 

Obs 

20 

.1         ..          ,i 

Det 

15-20 

Wis  R.  R  Comm. 

Det 

Piping  and  covering  

20-30 

Obs.  and  Det. 

Poles,  cedar  in  concrete  

12-18 

..         ..          .• 

Det. 

APPENDIX  C 


369 


TYPICAL  LIFE-EXPECTATION  FIGURES  FOR  PUBLIC-UTILITY 
PROPERTY.  —  Concluded 


Years 

Authority  * 

Control  t 

Electricity-supply  Works 
Poles,  cedar  in  earth  

10-18 

Wis.  R.  R.  Comm. 

Det. 

iron  or  steel  in  concrete  

15-30 

* 

10-15 

Wis.  R.  R.  Comm. 

Det. 

50 

* 

Obs 

Pumps,  boiler  feed  

15-20 

Wis.  R.  R.  Comm. 

Det. 

small  centrifugal  

20-30 

Det. 

10-12 

••         >•          ii 

Det. 

Shafting  

2(MO 

ii         <•          i. 

Obs. 

Station  wiring,  etc  

30 

ii         ii          ii 

Obs.  and  Det. 

Stokers  .  .          

20 

Chicago  Trac.  Val.  Comm. 

Det. 

15 

Wis.  R.  R.  Comm. 

Det. 

Switchboard  instruments  and  wiring  .  . 
Switchboards,  old  types  

25-30 
20-30 

Obs.  and  Det. 
Obs. 

new  types  

15-20 

ii         ii          ii 

Obs. 

Turbines,  hydraulic,  old  types  

25-40 

i<         ii          •• 

Obs. 

30-50 

•i         ii          ii 

Obs. 

steam,  large  units  

20 

.1          .i 

Det.  and  Obs. 

auxiliary  units  

10-20 

* 

Det.  and  Obs. 

10-15 

Wis.  R.  R.  Comm. 

Det. 

station  and  substation.  . 
Watt-hour  meters  (consumer's)  

20 
10-15 

Obs.  and  Det. 
Det. 

10-15 

ii         ii          •• 

Det. 

lead  covered  aerial  cable  
underground  cable 

10-15 
20-25 

"         "          " 

Det.  and  Obs. 
Obs. 

Telephone  Utilities 
Buildings                                

40 

Chicago  Tel.  Comm. 

Obs. 

12 

Wis.  R.  R.  Comm. 

Det.  and  Obs. 

underground  
Central  exchange  equipment  

20 
10 

Obs.  and  Det. 
Obs.  and  Det. 

Conduit  ...        

50 

Chicago  Tel.  Comm. 

Obs. 

Cross  arms                

8-12 

Wis.  R.  R.  Comm. 

Det. 

Furniture  and  tools  

7 

Det. 

Poles,  wood  in  earth  

12-15 

••         ii          •• 

Det. 

Power  plant  

8 

.i         ii          .i 

Det.  and  Obs. 

Private-branch  exchange  equipment  .  .  . 

8 
10 

Chicago  Tel.  Comm. 
Wis.  R.  R.  Comm. 

Det.  and  Obs. 
Det.  and  Obs. 

Wire,  copper,  line  

40 

Chicago  Tel.  Comm. 

Obs. 

copper,  interior  

30 

Obs. 

galv.  iron,  line  

8-15 

Wis.  R.  R.  Comm. 

Det.  and  Obs. 

APPENDIX  D 

TYPICAL  CITATION  ABBREVIATIONS  OF  LAW  REPORTS, 
ETC.,  MET  WITH  IN  UTILITY  DECISIONS 

Following  these  paragraphs  is  a  list  of  a  very  few  of  the  abbreviated  titles 
of  the  most  important  law  reports,  etc.,  apt  to  be  cited  in  commission  and  court 
public-utility  cases.  The  law  reports  are  collections  of  authoritative  exposi- 
tions by  courts,  arranged  by  the  court  reporters  generally  and  commonly  bear- 
ing their  names.  Each  case  reported  contains,  among  other  things,  the 
opinion  of  the  court,  showing  the  questions  presented  and  the  principles  applied, 
and  the  judgment  which  is  a  summary  of  the  result  arrived  at.  Not  all  cases 
in  the  many  courts  are  published  —  though  all  are  filed.  In  citations  the 
volume  number  precedes  the  abbreviation  and  the  page  number  follows  it. 

The  number  of  possible  titles,  including  the  many  state-court  reports,  is 
legion  and  a  list  may  be  found  in  most  law  dictionaries.  Some  of  the  state 
reports  will  be  found  cited  simply  by  the  state  name,  thus;  "90  Ala.  300," 
"30  Ariz.  300,"  "40  Cal.  400,"  etc.  The  court  system  may  require  something 
like  the  following;  "100  N.  Y.  App.  Div.  100,"  "20  Del.  Ch.  200,"  "30  Ills. 
App.  300,"  etc.  But  the  great  accumulation  of  abbreviated  titles,  for  both 
federal  and  state  reports,  exhibits  the  names  of  the  compilers  with  such  added 
designation  as  is  needed,  for  instance;  "10  Ben.  100"  (Benedict's  U.  S.  Dis- 
trict Court  Reports),  "23  How.  230  "  (Howard's  U.  S.  Supreme  Court  Reports), 
"3  Hughes  (U.  S.)  300"  (Hughes'  U.  S.  Circuit  Court  Reports),  "3  Hughes 
(Ky.)  300"  (Hughes'  Kentucky  Reports)  "12  Ired.  120"  (Iredell's  North 
Carolina  Law  Reports),  "8  Ired.  Eq.  80"  (Iredell's  North  Carolina  Equity 
Reports),  etc. 

The  several  state  public-utility  commission  citations  are  abbreviated  in 
various  unstandardized  ways,  but,  whatever  the  form  the  meaning  is  usually 
apparent,  for  example;  "3  Wis.  R.  R.  Comm.  200"  or  "3  Wis.  R.  C.  R.  300," 
"2  111.  P.  U.  Comm.  200,"  or  "2  111.  P.  U.  C.  R.  200,"  "1  Mass.  P.  S.  Comm. 
100,"  etc. 

Am.  Rep.,  American  Reports. 

Am.  State  Rep.,  American  State  Reports  (Bancroft  and  Whitney). 

Atl.  Rep.,  Atlantic  Reporter. 

C.  C.  A.,   •  U.  S.  Circuit  Court  of  Appeals  Reports. 

Cyc.,  Encyclopedia  of  Law  and  Procedure. 

Fed.,  Federal  Reports. 

Fed.  Rep.,  Federal  Reporter. 

I.  C.  C.  or  I.  C.  C.  R.,  Interstate  Commerce  Commission  Reports. 

N.  E.  Rep.,  Northeastern  Reporter. 

370 


APPENDIX  D  371 

N.  W.  Rep.,  Northwestern  Reporter. 

P.  U.  R.,  Public  Utilities  Reports,  Annotated. 

(The  only  compilation  exclusively  of  court  and 
commission  public-utility  decisions,  and  the  offi- 
cial publication  of  the  Association  of  Railroad 
Commissioners;  published  by  the  Lawyers  Co- 
operative Publishing  Co.,  Rochester,  N.  Y.) 

Pac.  Rep.,  Pacific  Reporter. 

S.  E.  Rep.,  Southeastern  Reporter. 

So.  or  South  Rep.,          Southern  Reporter. 

Sup.  Ct.,  or  Sup.  Ct. 
Rep.,  Supreme  Court  Reports. 

U.  S.,  United  States  Supreme  Court  Reports. 

U.  S.  App.,  United  States  Circuit  Court  of  Appeals  Reports. 


Abbreviations  in  law  citations, 

(Appendix  D),  370. 
Accounting, 

as  a  service  cost,  20. 

for  electric  and  street  railway,  220. 

for  gas  works,  286. 

for  railway  valuation,  199. 

for  telephone  systems,  333, 341, 343. 

for  water  works,  259. 
Accounts  disclose  value,  44. 
Accrued  deficits  measure  going  value, 

86. 

Adams,  C.  F.,  162. 
Adaptability,  value  of,  62. 
Adequate  telephone  service,  328. 
Administration,  cost  of,  77. 
Advertising  as  a  service  cost,  20. 
Albany,  N.  Y.,  water-works,  241. 
Alternating-current  distribution,  301. 
Alvord,  J.  W.,  258. 
American    District    Telegraph    Co., 

telephones,  319. 
American  electricity  rates,  315. 
American  Electric  Railway  Associa- 
tion, 211,  213,  215,  216,  220,  229. 
American  Gas  Institute,  280,  283. 
American  Society  of  Civil  Engineers, 

61,  81,  90,  254,  355. 
American  Telephone  and  Telegraph 

Co.,  318,  323,  324. 
American  Water-works  Association, 

90,  252,  254,  267. 
Amortization, 

apportionment,  25. 

as  service  cost,  20. 

of  intangibles,  91. 

Analysis  of  telephone  costs,  336,  340. 
Annual  costs  and  depreciation,  120. 
Annuity  tables  and  formulas, 
(Appendix  B),  352. 


Antiquation,  expense  of,  24. 
Apportioning  costs, 

as  fixed  and  operating  expense,  21. 

on  customers,  21. 
Apportionment, 

limitations,  28. 

of  administration  cost,  26. 

of  amortization,  25. 

of  depreciation  expense,  23. 

of  electric-railway  costs,  220,  336. 

of  electricity-supply  costs,  311. 

of  gas-works  costs,  27. 

of  general  expenses,  26. 

of  intangible  values,  91,  153. 

of  metering  expense,  27. 

of  railway  costs,  172. 

of  service  losses,  27. 

of  taxes,  23. 

of  telephone-utility  costs,  340. 
Appraisal, 

allowance  for  omissions,  77. 

cost  of,  53. 

discloses  value,  44. 

of  water  rights,  69. 

problems,  52. 

short  cuts,  56. 

use  of  inventories,  54. 
Appreciation  in  values,  48. 
Appreciation  of  railway  property,  195. 
Arc  lamps,  301,  307. 
Arc-lighting  system,  Brush,  301. 

Jablochkoff,  301. 
Architect's  fees,  80. 
Arnold,  B.  J.,  224. 
Attention,  compensation  for,  98. 
Attleboro,    Mass.,    water    consump- 
tion, 26L 


Bad  accounts  as  service  cost,  20. 
Baker,  M.  N.,  240,  259. 


373 


374 


INDEX 


Baltimore  gas  schedule,  290. 

Basing-point  railway  rates,  177. 

Battle  Creek,  Mich.,  water  consump- 
tion, 261,  271. 

Bell,  Alexander  Graham,  318. 

Bell  telephone  system,  318,  323,  324, 
327,  330,  331,  337,  346. 

Berliner's  telephone  transmitter,  319. 

Bethell,  U.  N.,  331. 

Bethlehem,  Perm.,  water-works,  240. 

Billing  and  collecting  as  service  cost, 
20. 

Birmingham,    effect    of    growth    on 
transit,  213. 

Blake's  telephone  transmitter,  319. 

Block,    geographical,    express   rates, 
205. 

Brick  mill  buildings, 
cost  (Appendix  A),  347. 
life  (Appendix  C),  366. 

Bond  commissions  and  discounts,  82. 

Bonds,  ratio  to  stock,  148. 

Boston  Society  of  Civil  Engineers, 
199. 

Boston  telephone  zone  rates,  337. 

Boston  water-works,  240. 

Bradlee,  H.  G.,  215. 

Breakdown  service  for  isolated  plants, 
315. 

British  Institute  of  Electrical  Engi- 
neers, 312. 

Brush  arc-lighting  system,  301. 

Buffalo,  measured  telephone  service, 
330. 

Buffalo  water-works,  241,  273. 

Building  valuation,  57. 
(Appendix  A),  347. 

Buildings,  life, 

(Appendix  C),  366. 

Bunsen  gas  burners  predominate,  280. 

Burdens  on  officials,  105. 

Burlington,   Iowa,   water   consump- 
tion, 261,  269. 

Burlington,  Vt.,  water  consumption, 
261,  276. 

Business  development  of  telephone, 
320. 

By-product-gas  rates,  281. 


Calorific  standard  for  gas,  280. 
Calorific  value  of  natural  gas,  288. 
Calorific  value  of  Baltimore  gas,  294. 
California  oil  gas,  282. 
Canadian  cities  electric  tariff,  314. 
Candlepower  standard  for  gas,  280. 
Candlepower  values  of  Baltimore  gas, 

294. 

Capacity   of   gas-works   distributing 
system,  284. 

manufacturing  system,  285. 

storage  holders,  285. 
Car  and  passenger  units  hi  street- 
railway  service,  223. 
Cases,      before     commissions     and 
courts,    see    Commissions    and 
Courts. 

Census  Bureau,  U.  S.,  252,  259,  278. 
Central  electric  station, 

first,  302. 

growth,  304. 

history,  300. 

Charges,  service,  for  water,  264. 
Charges,  checking  by  customers,  13. 
Charges,  minimum,  for  water,  263. 
Charges,  of  railways,  174. 
Charges,  see  also  Rates. 
Charging  all  traffic  will  bear,  11,  16. 
Chicago  lighting  system,  310. 
Chicago  telephone  cases,  337. 
Chicago  water-works,  241. 
Citation  of  law  reports, 

(Appendix  D),  370. 
Cities,  water-works  in  typical,  267. 
City  control  of  street  railways,  235. 
City  rapid  transit  and  fares,  229. 

rapid-transit  planning,  230. 
Classes  of  customers, 

electricity  supply,  303,  311. 

electric  railway,  216. 

express  transportation,  203. 

gas  supply,  283,  285,  289,  293. 

kinds  of,  14. 

need  for,  6,  13. 

street  railway,  216. 

telephone,  339. 

water-works,  250,  257,  260,  265. 
Classification  of  railway  freight,  174. 


INDEX 


375 


Classes  of  rates  illustrated,  8. 
Classes  of  utilities,  5. 
Cleveland,  Ohio, 
fares,  234. 

street-railway  history,  234. 
water-works,  241. 
Coke-oven  gas  in  Baltimore,  294. 
Commission  Cases, 

Beloit  v.  Beloit  Water  G.  &  E.  Co.; 

7  Wis.  R.  R.  Comm.  187,  89. 
Blue  Hill  St.   Ry.;   Mass.  P.   S. 

Comm.  No.  886,  82. 
Bogart  v.  Wis.  Tel.  Co.;  Wis.  R.  R. 

Comm.,  1916,  341. 
Boston  Edison  Co.;  24th  An.  Rep. 

Mass.  Bd.  G.  &  E.  L.  Comm.,  14. 
City  of  Santa  Cruz;  Calif.  R.  R. 

Comm.  No.  2666,  67. 
classification  of  accounts;  I.  C.  C. 

1913  and  1914,  25. 
express    rate    cases   of  Interstate 

Commerce  Commission,  202,  207. 
Fuhrman  v.  Cataract  Power  Co.; 

3  N.  Y.  P.  S.  Comm.  2nd  D. 

670,  66. 
Grafton  Light   &   Power   Co.;    4 

N.  H.  P.  S.  Comm.  178,  67. 
Hill  v.  Antigo  Water  Co.;  3  Wis. 

R.  R.  Comm.  623,  88. 
Janesville  v.  Janesville  Water  Co.; 

7  Wis.  R.  R.  Comm.  628,  89. 
Kings      County      Lighting      Co.; 

N.  Y.  P.  S.  Comm.  1st  D.  1911, 

43,  50. 
Marinette  v.  City  Water  Co.;  8 

Wis.  R.  R.  Comm.  334,  89. 
McGowan  v.   Rock   County  Tel. 

Co.;  14  Wis.  R.  R.  Comm.  529, 

338. 
Middlesex  &  Boston  St.  Ry.;  Mass. 

P.  S.  Comm.,  38. 

Merihew  v.  Kings  County  Light- 
ing Co.;  N.  Y.  P.  S.  Comm.  1st 

D.  1914,  43,  50. 
Milwaukee  v.  T.  M.  E.  R.  &  L.  Co.; 

10  Wis.  R.  R.  Comm.  1,  219. 
Milwaukee  E.  R.  &  L.  Co.  rates; 

13  Wis.  R.  R.  Comm.  475,  238. 


Commission  Cases  (cont.), 

Milwaukee    suburban    fares;     13 

Wis.  R.  R.  Comm.  245,  225. 
minimum        monthly        charges; 

N.  J.  P.  S.  Comm.  1912,  33. 
Monroe  v.   Clinton  Tel.   Co.;   10 

Wis.  R.  R.  Comm.  598,  338. 
Montpelier  &  Barre  L.  &  P.  Co.; 

Vt.  P.  S.  Comm.  No.  452,  68. 
N.   E.   Tel.   &   Tel.   Co.,   Boston 

Rates;  Mass.  Highway  Comm. 

1908,  337. 
N.  Y.  Central  Bonds;  111.  P.  U. 

Comm.  No.  3629,  83. 
No.  Calif.  Power  Co.;  Calif.  R.  R. 

Comm.  1913,   66. 
Oconto  City  Water  Co.;  7  Wis. 

R.  R.  Comm.  497,   89. 
Passaic  90<£  Gas  Case;  N.  J.  P.  S. 

Comm.  1915,   137. 
Pocatello  Water  Co.;  1  Idaho  P.  S. 

Comm.  78,  66. 
Queensborough  Gas  &  Elec.  Co.; 

N.  Y.  P.  S.  Comm.  1st  D.,  1911, 

50. 
Racine  v.  Racine  Gas  Lt.  Co.;  6 

Wis.  R.  R.  Comm.  228,  89. 
Ripon  Water  &  Lt.  Co.;  Wis.  R.  R. 

Comm.  1910,  309. 
railway  rate    cases    of    Interstate 

Commerce  Commission,  172, 179. 
St.  Croix  Tel.   Co.;  Wis.  R.  R. 

Comm.  1915,  338. 
State  Journal  v.  Madison  G.  &  E. 

Co.;  4  Wis.  R.  R.  Comm.  580, 

59,  88,  309. 
street-railway  service;  N.  Y.  P.  S. 

Comm.  IstD.  1908  and  1910, 225. 
So.  Englewood  Imp.  Assoc.  v.  N.  J. 

&  H.  R.  Ry.;  N.  J.  P.  S.  Comm. 

1911,  219. 
Taylor  v.  N.  W.  L.  &  Water  Co.; 

Idaho  P.  U.  Comm.  297,  68. 
Whiter  v.  La  Crosse  Tel.  Co.;  15 

Wis.  R.  R.  Comm.  36,  338. 
Commission  powers,  136. 
Commission  regulation  of  telephone 

rates,  332. 


376 


INDEX 


Commission     value-of-service     tele- 
phone study,  333. 

Commissions  on  bonds,  82. 

Community  rating,  for  value  of  tele- 
phone service,  334. 

Comparisons  of  electric-railway  costs, 
217,  235. 

Compensation,  extra  for  special  serv- 
ice, economy,  etc.,  3. 

Compensation  for  attention,  98. 

Compensation  for  risk,  3,  97. 

Competition  and  cost  of  service,  10. 

Competition,  continuing  results  under 
monopoly,  10. 

Competition  of  gas  and  electricity, 
278. 

Competition    of    electric    cars    and 
omnibuses,  233. 

Competition  or  monopoly,  151. 

Competitive  business  secured  at  low 
rates,  14. 

Compound-interest  tables  and  formu- 
las, 
(Appendix  B),  352. 

Concentration  factor  of  electric-rail- 
way traffic,  216. 

Condemnation  cost,  60. 

Condemnation  powers,  164. 

Confiscation  and  rates,  11. 

Connecticut  water-works,  241,  267. 

Construction  interest,  78. 

Consumption  of  water,  260,  267. 

Contingencies,  cost  of,  81. 

Continuous    electric-supply    service, 
308. 

Contractor's  profit,  80. 

Contracts,  value  of,  43. 

Control  of  street  railways  by  city,  235. 

Cost  accounting  for  water-works,  259. 

Cost  analysis,  telephone,  336,  340. 

Cost  of  administration,  77. 
bond  discounts  and  commissions, 

82. 

business  development,  85. 
condemnation,  60. 
contingencies,  81. 
electric-railway  construction,  225, 
230. 


Cost  of  engineering,  80. 
fire  protection,  255. 
gas  in  American  cities,  296. 
insurance,  79. 

interest  during  construction,  78. 
labor  reduced,  155. 
operation  for  electric  railways,  217, 

236. 

organization,  77. 
piecemeal  work,  79. 
preliminary  work,  77. 
promotion,  85. 
natural  gas,  288. 
railways  apportioned,  172. 
rapid  transit,  229. 
taxes  during  construction,  79. 
Cost-of-service  approach  to  rates,  10, 

18. 
Cost-of-service    fixes    prices    under 

competition,  10. 
Cost-of-service  in  railway  rates,  168, 

181. 

Cost-of-service     rate    basis,     hypo- 
thetical illustration,  34. 
Cost-of-service  telephone  rates,  336. 
Cost  schedules,  19,  29. 
Cost,  vicious  spiral  of,  154. 
Costs  and  utility  class,  6. 
Costs,  annual,  related  to  depreciation, 

120. 

Costs,  apportioned  as  fixed  and  oper- 
ating expenses,  21. 

Costs,  apportioned  on  customers,  21. 
Costs,  rising,  effect  on  depreciation, 

124. 

Court  Cases, 
Cedar  Rapids  Gaslight  Co.;   223 

U.  S.  665,  64. 

Con.  Gas.  Co.  v.  Wilcox;  157  Fed. 
849;  212  U.  S.  19,  40,  49,  63, 
131. 

Cumberland  Tel.  &  Tel.   Co.  v. 
Louisville;  187  Fed.  Rep.  637, 
129. 
Des  Moines  Gas  Co.;  199  Fed.  204, 

35  Sup.  Ct.  Rep.  811,  46,  64. 
Kansas  City  Water  Works;  62  Fed. 
Rep.  853,  85. 


INDEX 


377 


Court  Cases  (cont.\ 
Knoxville  Water  Co.;  29  Sup.  Ct. 

Rep.  148,  113. 
McGovern  v.  N.  Y.;  130  App.  Div. 

350,  63. 

Metropolitan  Trust  v.  Houston  & 

T.  C.  Ry.;  90  Fed.  Rep.  683,  89. 

Minnesota  Rate  Cases;  230  U.  S. 

352,  39,  40,  61,  62. 
Munn  v.  Illinois;  94  U.  S.  113,   10, 

163. 
Passaic  90(4  Gas  Case;  N.  J.  Errors 

&  App.  1915,  137. 
People  ex.  rel.  Kings  County  Ltg. 
Co.  v.  Wilcox;  210  N.  Y.  479,  64. 
People  ex.  rel.  Manhattan  Ry.  v. 

Woodbury,  203  N.  Y.  239,  128. 
Peoria  Water  Co.  v.  Central  Ry.; 

U.  S.  C.  C.  App.  1910,  144. 
Pocatello  Water  Co.;  Idaho  Sup. 

Ct.;  150  Pac.  47,  67. 
Postal  Tel.,  West.  U.,  and  L.  S.  & 
M.  S.  R.  R.  v.  C.  L.  S.  &  S.  B. 
Ry.;  111.  Sup.  Ct.  1911,  144. 
R.  R.  Comm.  Cases,  116  U.  S.  307, 

12. 
Reagan  v.  Farmers  Loan  &  Trust 

Co.;  154  U.  S.  362,   12. 
San  Joaquin  &  Kings  River  Co.  v. 
Stanislaus  County;    233  U.  S. 
459,  67. 

Spring  Valley  Water  Co.  v.  San 
Francisco;  165  Fed.  Rep.  667, 
89. 
Smyth  v.  Ames;  169  U.  S.  466,  12, 

39. 

Court  views  on  sinking  funds,  126. 
Courts   determine  only   confiscation 

or  extortion,  12. 
Courts  do  not  fix  rates,  12. 
Customer  classes,  see  Classes. 
Customer  costs,  27. 
Customer  costs  of  electric  railways, 

217. 

Customers  checking  kills,  13. 
Customer's  demand  affects  rates,  6. 
Customers,  grouping  of,  31,  see  also 
Classes  of  Customers. 


Customers,  telephone,    interdepend- 
ence, 340. 

Davies,  J.  V.,  230. 

Decisions  of  commissions  and  courts, 
see  Commission  Cases  and  Court 
Cases. 
Deficient  profits  due  to  plant  losses 

or  mismanagement,  18. 
Deficits,  accrued,  86. 
Definition  of  public  utility,  2. 
Demand  and  storage,  5. 
Demand  and  service  capacity,  5. 
Demand   charge,   in   Baltimore   gas 

rates,  290. 

Demand  costs  of  gas,  286. 
Depreciation, 

accumulated  and  annual,  46. 
and  rates,  107. 
and  rising  costs,  124. 
computed, 
by  equal-annual-payment  plan, 

121. 

by  sinking-fund  plan,  117. 
by  straight-line  plan,  117. 
denned,  108. 
expense    apportionment,    21,    24, 

25. 

hen  illustration,  131. 
nomenclature,   108;    see  also    Re- 
newance,    110,    and    Retirance, 
110. 
of   electric-railway  property,   195, 

227. 
of  various  utility  equipment,  see 

life-expectation  tables,  366. 
plans  compared,  127,  130,  131. 
related  to  annual  costs,  20,  120. 
tables  (Appendix  B  and  C),  352, 

366. 
Denison,   Tex.,   water  consumption, 

262,  275. 
Delivery  and  pick-up  terminal  express 

charges,  206,  207. 
Delusions  of  hydrant  rentals,  252. 
Des  Moines,  Iowa,  water  consump- 
tion, 261,  269. 
Design  and  inspection,  cost  of,  80. 


378 


INDEX 


Design,  effect  on  value,  92. 
Deterioration  expense,  24. 
Detroit,  effect  of  growth  on  transit, 
212. 

electric  rate  system,  313. 
Development  of, 

business,  85. 

electric  service,  303,  307. 

electric  railroads,  208. 

express  transportation,  201. 

gas  works,  277. 

gas  schedules,  285,  288,  293. 

railroads,  162. 

telephone  service,  320. 

water-works,  240. 
Dickerman,  J.  C.,  296. 
Discarded  plant,  value  of,  83. 
Discounts  on  bonds,  82. 
Discrimination,  4,  146. 
Distributing  costs  of  extended  water- 
works, 258. 
Distribution    of    electricity,   Edison 

network  and  feeders,  301. 
Diversity  factor  affects  expense  ap- 
portionment, 31. 
Diversity  factor,  15,  31. 

in  telephone  service,  326,  330,  336. 

individual  and  group,  15. 

on  electric  railways,  216. 

on  electricity  supply,  310. 

on  gas  works,  284. 

on  water  works,  249. 
Dividing  scales  of  profit,  101. 
Division  of  excess  profits,  104. 
Doherty,  H.  L.,  7. 
Doolittle,  F.  W.,  211. 

Early  Edison  electric  rates,  303. 

Economies  in  railroad  operation,  200. 
in  street  and  electric-railway  opera- 
tion, 215. 

Economy  vs.  higher  rates,  158. 

Edison,  T.  A.,  301,  307,  319. 

Edison  lighting  system,  278,  301, 
307. 

Edison's  telephone  transmitter,  319. 

Electric  central  station,  history,  300. 

Electric  lighting,  development,  307. 


Electric  railway, 

a  service-type  utility,  215. 

accounting,  220. 

and  congestion  of  population,  214. 

customer  costs,  217. 

depreciation,  227. 

development,  209,  212,  214,  225. 

economics  and  finance,  214,  215. 

expense  apportionment,  220,  336. 

fare  making,  218,  237. 

fare  zones,  218,  223. 

fares  by  New  Jersey  and  Wisconsin 
methods,  219. 

fixed  charges,  217. 

operating  costs,  217. 

plant  life,  227,  366. 

service  units,  223. 

technology,  209,  214,  225. 
Electric  residence  rates,  311. 
Electricity  meters,  308. 
Electricity-meter  energy  losses,  309. 
Electric  service,  continuity,  308. 
Electric-service  requirements,  305. 
Electric  station  diversity,  310. 
Electric-supply  technology,  305. 
Electricity,  field  of  and  uses  for,  303. 
Electricity  rates,  300. 
Eminent-domain  powers,  164. 
Engineering, 

cost  of,  81. 

design  and  inspection,  80. 

tasks  in  valuation,  52. 
Engineers,    selection    of    valuation, 

52. 

Equal-annual-payment  plan  for  de- 
preciation and  retirance,  121. 
Equity,    individual,    versus    general 

welfare,  16. 
Erickson,  H.,  312. 
Examples    of    American    telephone 

rates,  346. 
Expense  apportionment, 

affected  by  diversity,  31. 

electric  railway,  220. 

electricity  works,  311. 

express  transportation,  206. 

gas  works,  284,  286,  293. 

railways,  172. 


INDEX 


379 


Expense  apportionment  (cont.), 

telephone  service,  336,  341,  343. 

water-works,  256,  258,  259. 
Exchange,  telephone,  first,  319. 
Exchange,  telephone,  practice,  325. 
Early  utility  rates,  178,  203,  211,  213, 

283,  303,  330. 
Expectation  life  tables, 

(Appendix  C),  366. 
Express  transportation, 

companies'  division  of  territory,  202. 

companies'  interrelations,  201. 

development,  201. 

rates  changed  by  Interstate  Com- 
merce Commission,  202,  205. 

Fair  value, 

bases  compared,  37. 

court  decisions,  39. 

defined,  36. 

Fallacy  of  water  rights,  75. 
Fare   making   for   electric   railways, 

218,  223,  224,  235. 

Fare  Research  Bureau,  of  American 
Electric     Railway     Association, 
211,  216. 
Fare  zones  for  electric  railways,  218, 

223,  237. 
Fares, 

Cleveland  sliding  scale,  235. 

inflexibility  of,  218. 

Milwaukee  zone  system,  237. 

New  Jersey  and  Wisconsin  method 

of  making,  219,  237. 
Fast  and  slow  meters,  308. 
Finances, 

electric  railway,  215. 

electricity  supply,  303,  304. 

express  transportation,  202. 

gas  works,  278. 

railways,  162. 

telephone  service,  320,  324,  329. 

water-works,  242. 
Fire  service  of  water-works,  250,  251, 

253,  255,  257. 
Fixed  charges  or  costs, 

apportionment,  25,  31. 

depreciation  as,  25. 


Fixed  charges  or  costs  (cont.), 

of  electric  railways,  217,  221,  230, 
235. 

of  electricity-supply  works,  311. 

of  gas  works,  284,  286. 

of  railways,  168. 

of  telephone  utilities,  323,  329,  336, 
340. 

of  water-works,  251,  259,  266. 

reduction,  25. 

schedules,  19,  29. 

tests  for,  21. 

Flat  telephone  rates,  330. 
Forbes,  W.  H.,  321. 
Formulas  for  sinking  funds,  annuities, 

etc.  (Appendix  B),  365. 
Forstall,  A.  E.,  283. 
Franchise,  street-railway,  Cleveland, 

235. 
Franchises, 

as  property,  65,  137. 

indeterminate  term,  140. 

public  regard  of,  136,  138. 

short  term,  140. 

value  in  rates,  137. 

value  of,  65. 
Freeman,  J.  R.,  251,  254. 

Gas  industry, 

census  statistics,  278. 

development,  277. 
Gas  lighting, 

in  American  cities,  277. 

in  London,  277. 
Gas  meters,  283. 
Gas,  natural, 

rates,  288. 

service,  287. 
Gas  rates,  277. 

Gas-rate  system  of  Baltimore,  290. 
Gas-works  accounting,  286. 
Gas-works  demand  costs,  286. 
Gas-works  technology,  279. 
Gear,  H.  B.,  310. 
General  expense,  apportionment  of, 

26. 

Geneva,  N.  Y.,  water  consumption, 
261,  273. 


380 


INDEX 


Geographical  blocks  used  in  making 

new  express  rates,  205. 
Going  value,  41,  85. 
by  depreciation  method,  91. 
by  reproduction  method,  90. 
by  Wisconsin  method,  87. 
Grouping  customers,  31. 
Growth  of  cities  and  transit  burdens, 
212,  214,  225. 

Hadley,  A.  T.,  162. 
Hall,  E.  J.,  331. 
Hawley,  W.  C.,  254,  255. 
Hazen,  A.,  254. 

Health-board  supervision  of  water- 
works, 244. 

Hen  illustration  of  depreciation,  131. 
Hendrick,  F.,  166. 
High  cost  of  living,  154,  155. 
History  of, 

electricity  works,  300. 

express  companies,  201. 

gas  works,  277. 

railroads,  162. 

street  railways,  208,  234. 

telephone  utilities,  318. 

water-works,  240. 
Holmes  Boston  Burglar  Alarm  Service 

telephones,  319. 

Hopkinson,  John,  originator  of  de- 
mand-output rate,  7. 
Horton,  Robert  E.,  70,  71. 
Hubbard,  G.  G.,  320. 
Hughes'  telephone  transmitter,  319. 
Hydrant  rentals,  252. 

Incandescent  electric-lighting  sys- 
tem, Edison,  301,  307. 

Increasing-returns  law,  170. 

Increments  in  value,  48. 

Insurance  and  fire  protection,  257. 

Insurance  during  construction,  79. 

Independent  telephone  companies, 
322. 

Intangible  values  amortized,  91. 

Interdependence  of  telephone  classes, 
340. 

Interest  during  construction,  78. 


Interest,  pure,  96. 
Interference  of  utilities,  144. 
Interstate  Commerce  Commission. 

accounting  rules,  25. 

early  views,  179. 

established,  166. 

expense  apportionment,  220. 

express  rates,  202,  205. 

railway  rates,  176. 

valuation  division,  197. 
Interurban  electric-railway  rate  prob- 
lems, 208,  214,  237. 
Inventories  in  valuation,  54. 
Inventory  omissions,  77. 
Investment, 

electric  railway,  209,  230. 

electricity-supply  works,  304. 

express  companies,  202. 

funds  scarce,  159. 

gas  works,  278. 

lost  by  depreciation,  110. 

railways,  162. 

rapid-transit  lines,  230. 

repaid  by  retirance,  110. 

telephone  utilities,  329. 

water-works,  242. 
Isolated-plant  breakdown  rates,  315. 

Jitney  bus,  233. 
Johnson,  W.  S.,  260. 
Jordan,  F.  C.,  267. 

Kapp  electric  rate  system,  315. 
Knoxville  decision  of  Supreme  Court, 

113. 
Kuichling,  E.,  254,  255. 

Labor, 

as  a  service  cost,  20. 

cost  reduced,  155. 

cause  of  inefficiency,  156. 

satisfactions  of,  156. 

position  of  utility,  158. 
Lamps  and  lighting, 

electric  arc,  301,  307. 

electric  incandescent,  301,  307. 

gas  flames  and  burners,  280. 
Latitude  allowed  rate-makers,  2. 
Law  of  increasing  returns,  170. 


INDEX 


381 


Law  report  citations, 
(Appendix  D),  370. 

Law,  Wisconsin  utility,  140. 

Leakage  of  water  past  meters,  264. 

Life  expectation  tables, 
(Appendix  C),  366. 

Life  of  electric-railway  plant,  229. 

Lighting    and    power    electric-load 
ratios,  305. 

Lighting  system,  Edison,  301,  307. 
Brush,  301. 
Jablochkoff,  301. 

Load  curves  of  Baltimore  gas  works, 
293. 

Load  factor  of  electric  and  street  rail- 
ways, 216,  223. 

Local  conditions  affect  rates,  2. 

Local-utility  services  compared  with 
telephone,  327. 

Location,  effect  on  value,  92. 

Long-distance  telephone  service,  321. 

London  gas  lighting,  277. 

Losses    caused    by    electric    meters, 
309. 

Losses  distributed  as  service  costs, 
20. 

Louisville,  Ky.,  natural-gas  rates,  288. 

Main,  C.  T.,  57,  347. 

Maine  water-works,  241. 

Main's  curves  and  tables  formill costs, 

(Appendix  A),  347. 
Making  Baltimore  gas-rate  schedules, 

293. 

Maltbie,  M.  R.,  49. 
Manufacture  of  artificial  illuminating 

gas,  281. 
Manufacturing  capacity  of  gas  works, 

285. 

Market  value  of  plant,  36. 
Marks,  W.  D.,  101. 
Massachusetts, 

electric-railway  dividends,  215. 

telephone  cases,  337. 

water-rate  control,  244. 

water-works,  241,  270. 
Maximum    demands,    electric    cus- 
tomers', 309. 


McDonald,  D.,  288. 

Memphis,  effect  of  growth  on  transit, 

213. 

Metcalf,  L.,  254,  255,  367. 
Metered  telephone  service,  330. 
Metering   costs,    apportionment    of, 

20,  27. 
Meters, 
electric,  308. 
fast  and  slow,  308. 
gas,  277,  283. 
telephone,  330. 
water,  249. 
Meyer,  B.  H.,  166. 
Monopoly,  continuing  results  of  com- 
petition under,  10. 
Monopoly  or  competition,  151. 
Morristown,  N.  J.,  water-works,  240. 
Morse,  J.  G.,  53. 
Miller,  A.  S.,  283. 
Milwaukee, 
effect  of  growth  on  rapid  transit, 

212. 
rush-hour    street-railway    service, 

225. 

telephone-cost  apportionment,  343. 
zone  system  of  fares,  237. 
Minimum  charges,  33,  203,  205,  263, 

285,  311. 

Miscellaneous  problems,  134. 
Municipal  electric  central  stations, 

304. 

Municipal  gas  works,  279. 
Municipal-utility  discrimination,  4. 

National  Board  of  Fire  Underwriters, 
254,  256. 

National  Conference  on  City  Plan- 
ning, 230. 

National  Electric  Light  Association, 
7,  11,  15,  55,  309,  310. 

Natural  Gas  Association,  288. 

Natural  gas  rates,  Louisville,  288. 

Natural-gas  utilities,  287. 

Natural  gas  utility  a  mining  venture, 
288. 

New  England  Water-works  Associa- 
tion, 251,  260,  264,  265. 


382 


INDEX 


New  Hampshire  water-works,   241, 

272. 
New  Haven,  first  telephone  exchange, 

319. 

New  Orleans  water-works,  241,  270. 
New  York  City, 
changes  street  lamps,  316. 
metered  telephones,  331. 
rush-hour    street-railway    service, 

225. 

water-works,  240. 

New  York  Law  Telegraph  Co.  tele- 
phones, 319. 

Newark,  N.  J.,  street-railway  termi- 
nal, 231. 
Nickel  street-railway  fares,  211,  213, 

237. 

Norwich  electric  residence-rate  sys- 
tem, 311. 

Obligations  of  public  utility,  3. 
Obsoletion,  expense  of,  24. 
Off-peak  business,  benefits  of,  14. 
Off-peak     electric-railway     business, 

216,  223. 

Office  expense  as  a  service  cost,  20. 
Omissions  in  inventory,  77. 
Omnibus   competition   with   electric 

cars,  233. 
Operating  costs, 

and  depreciation,  124. 

electric  railway,  217,  221,  226,  235. 

electricity  supply,  311,  316. 

gas  works,  297. 

railroads,  169,  172. 

telephone  utilities,  336,  341,  343. 

test  for,  21. 

water-works,  259,  264. 
Organization,  cost  of,  77. 
Original  conditions  affect  value,  45. 
Originating  and  terminating  traffic, 
as  basis  of  telephone  cost  ap- 
portionment, 343. 
Output  costs  of  gas  works,  284. 
Overcharges,  when  justified,  16. 

Passaic,  N.  J.,  water  consumption, 

262,  272. 
Passaic  90ji  gas  case,  137. 


Paving  over  mains,  63. 

Peak-load   electric-railway  business, 

216,  223. 

Peak-load  telephone  cost  apportion- 
ment, 343. 

Peak-loads  on  gas  works,  284,  294. 
Philadelphia  water-works,  241,'  275. 
Piecemeal-construction  costs,  79. 
Plant,  discarded,  value  of,  83. 
"Point  Five"  electricity  tariff,  311. 
Political  place  of  utility  regulation,  1. 
Polleys,  T.  A.,  60. 
Portland,  Ore.,  water  consumption, 

261,  274. 

Portsmouth,  N.  H.,  water-works,  241. 
Power  and  lighting  load  ratios,  305. 
Power  of  eminent  domain,  164. 
Power  rates,  electric,  314. 
Preliminary  work,  cost  of,  77. 
Present-value  tables, 

(Appendix  B),  355. 
Preventing  water  waste,  260. 
Primary  rate  for  gas,  Baltimore,  290. 
Principles  of  rapid-transit  plan,  230. 
Private  fire-protection,  charges,  257. 
Problems  of  utility  rates, 

all  met  in  electricity  supply,  300. 

electric  railway,  208. 

express  companies,  201. 

gas  works,  277. 

miscellaneous,  134. 

railroads,  161. 

telephone  utilities,  318. 

water-works,  240. 
Product  type  of  utility,  5. 

gas  works  as,  283. 

water-works  as,  242. 
Profits, 

contractor's,  80. 

deficiency  due  to  plant  losses  or 
mismanagement,  18. 

extra,  99,  101,  104. 

from  non-utility  business,  19. 

promoter's,  85. 
Property, 

appreciation  of  railway,  195. 

contracts  as,  43. 

depreciation  of  railway,  195. 


INDEX 


383 


Property  (ctmO, 

express  companies,  202. 

franchises  as,  65. 

used  and  useful,  65. 

water  rights  as,  66. 
Proportion   between    electric   power 

and  lighting  loads,  305. 
Public  burdens,  150,  153. 
Public  policy,  149. 
Public  relations,  160. 
Public  rights  hi  utility  service,  3. 
Public-service-commission  control  of 

water-works,  243. 
Public  utility,  see  Utility. 
Publicity,  value  of,  150. 
Purpose  affects  valuation,  42. 

Quantity  of  service  enters  rate,  6. 
Quantity  variation  of  gas  costs,  285. 

Railroad, 

appreciation  of  property,  195. 

as  service  utility,  167. 

charges  computed,  174. 

commissions,  166. 

common  carriers,  163. 

economies  suggested,  200. 

expenses    independent    of    traffic, 
169. 

expenses  segregated,  170,  172. 

express  freight,  see  express,  201. 

federal  lines,  163. 

finance,  162,  193. 

freight  classification,  174. 

Granger  attacks,  165. 

industry,  162. 

joint  costs,  170. 

regulation,  161,  164. 

right  of  eminent  domain,  164. 

state-owned  lines,  163. 

valuation  by  federal  commission, 

197. 
Railroad  rates, 

and  law  of  increasing  returns,  170. 

and  natural  advantages,  191. 

basing  point,  177. 

computed,  174. 

cost  of  service  in,  168,  181. 


Railroad  rates  (conO, 

difficulties  of  logical  schemes,  161. 

early,  178. 

effect  of  competition,  184,  192. 

effect  of  distance,  182. 

effect  of  market  prices,  180. 

effect  of  risk,  183. 

federal  versus  state,  184. 

fixed  by  general  public  interest,  182, 
190. 

passenger  fares,  193. 

through,  and  sum  of  locals,  184. 

trunk  line,  175. 

value  of  commodity  in,  179. 

vested  interests  protected,  189. 

zone,  176. 

Rapid  transit  and  fares,  229. 
Rapid-transit  planning,  230. 
Rate  classes  illustrated,  8. 
Rate  problems, 

electric  railway,  208. 

electricity  supply,  300. 

express  companies,  201. 

gas  works,  277. 

miscellaneous,  134. 

railroads,  161. 

telephone  utilities,  318. 

water-works,  240. 
Rates, 

and  confiscation,  11. 

and  customer's  demand,  6. 

and  depreciation,  107. 

and  quantity  of  service,  6. 

federal  versus  state,  184. 

for  fire  protection,  251,  253,  255, 
257. 

for  off-peak  business,  14. 

for  water,  standard  form,  265. 

reasonable  by  legislation,  12. 

residence,  electric,  311. 

secondary  to  service,  8. 

simplicity  desirable,  30. 

sound  and  unsound  bases  for,  11. 

two-  and  three-part,  6. 

unit  and  flat,  6. 

value-of-service  telephone,  331, 333. 
Rating  communities  for  value  of  tele- 
phone service,  334. 


384 


INDEX 


Rating  gas-customer's  demands,  290. 
Real  estate  appraisal,  59. 
Reasonable  haul  on   electric   roads, 

223,  224. 

Reasonable  return,  96. 
Reduction  of  fixed  charges,  25. 
Reduction  of  value,  sudden,  94. 
Regulation  of  utilities, 

affecting  water  rights,  73. 

avenues  of,  135. 

electric  railways,  219. 

electricity  supplies,  300. 

express  companies,  202. 

future,  135. 

gas  companies,  286. 

political  place  of,  1. 

railroad,  163. 

telephone  utilities,  332. 

water-works,  243. 
Renewance,  110. 
Rentals,  20. 

Repairs  as  a  service  cost,  20. 
Repayment  of  depreciation  cost,  228. 
Reservoirs,  value  of,  76. 
Residential  rates,  electric,  311. 

gas,  290. 
Retirance, 

choice  of  plans,  130. 

computed,  115,  117,  123. 

defined,  110. 

failure  to  collect,  113. 

fixed  by  appraisal,  116. 

plans  compared,  127. 

provided  by  maintenance,  115. 

relation  to  depreciation,  111. 

relation  to  value,  112. 

subdivided,  111. 

Return  on  property  as  cost  of  serv- 
ice, 19. 

Rhode  Island  water-works,  241,  275. 
Richmond,  Va.,  water  consumption, 

261,  276. 

Rights  of  public  in  utility  service,  3. 
Ripley,  W.  Z.,  168,  174,  176. 
Risk, 

a  factor  in  railroad  rates,  183. 

compensation  for,  97. 

factors  increasing,  97. 


Rush-hour  electric-service  standards, 
215. 

Sacramento,  Calif.,  water  consump- 
tion, 261,  267. 
Salaries  as  service  cost,  20. 
Saliers,  E.  A.,  132. 
San  Francisco,   measured  telephone 

service,  330. 

San  Francisco  water-works,  241,  267. 
Sanders,  Thos.,  320. 
Saunders,  H.  J.,  199. 
Schedule  of  service  costs,  19,  29. 
Seabrook,  A.  H.,  312. 
Secondary  rate  for  gas,  Baltimore,  290. 
Separation  of  railway  expenses,  172. 
Service, 

cannot  be  stored,  5. 

capacity  and  demand,  5. 

ideals  needed,  160. 

quality  of  street-railway,  225,  236. 

telephone,  adequate,  328. 

telephone,  long  distance,"321. 

type  of  utilities,  5,  161,  201,  215, 
242,  300,  327. 

water-works  requirements,  245, 250. 
Service  charges, 

electricity-supply,  311,  317. 

gas  works,  285,  290. 

water-works,  264. 
Sewage  flow  and  water  consumption, 

249. 

Sewerage  utilities,  5. 
Shepherd,  F.  C.,  199. 
Short  cuts  in  appraisals,  56. 
Simplicity  in  rates,  30. 
Sinking-funds  and  depreciation,  117. 

court  views,  126. 

tables  (Appendix  B),  352. 

see  also  Depreciation  and  Retirance. 
Sliding  scales, 

electricity  rates,  311. 

gas  rates,  283. 

street-railway  fares,  235. 

telephone  rates,  331,  335. 

water  rates,  262. 

eee  also  Dividing  Scales  of  Profits, 
101. 


INDEX 


385 


Slow  and  fast  meters,  308. 

Spiral  of  costs,  154. 

Standard  form  of  water  rate,  265. 

Stock,  ratio  to  bonds,  148. 

Storage  and  demand,  5. 

Storage  of  utility's  product,  5,  242, 

284,308,327. 

Storage  reservoirs,  value  of,  76. 
Straight-line  depreciation,  117. 
Straight-line  retirance  plans  modified, 

120. 

St.  Croix  telephone  case,  cost  appor- 
tionment, 341. 

Stanley-Westinghouse       alternating- 
current  system,  302. 
Station,     central     electric,     history, 

300. 

Station-load  diversity,  310. 
Statistics     of     gas     industry,     278, 

296. 
Steam-power    comparison    of    water 

rights,  72. 
Stearns,  F.  P.,  121. 
Step  schedules  of  water  rates,  262. 
Stone,  C.  H.,  280. 

Storage  capacity  of  gas  holders,  285. 
Street-lighting  rates,  316. 
Street  and  electric  railways, 

accounts,  220. 

depreciation,  227. 

development,  209,  212,  214,  228. 

earnings,  215,  235. 

economics,  214,  215,  225. 

finance,  215,  225. 

nickel  fares,  211,  213,  223. 

retirance,  227. 

technology,  209. 

three-cent  fares,  235. 

transfers,  232,  239. 
Subscribers'  (telephone)  classes,  339. 
Subscribers'  interdependence,  340. 
Supplies  enter  service  cost,  20. 
Surplus,  appropriations  to,  enter  serv- 
ice cost,  20. 

Suspense  accounts,  228. 
Switchboards,  telephone,  326. 
Switchboard,     telephone,     develop- 
ment, 320. 


Tables  for  sulking  fund  and  present 
value  computations, 

(Appendix  B),  352. 
Taxes,  apportionment  of,  21. 
Taxes,  as  service  cost,  20. 
Taxes  during  construction,  79. 
Tayler  street-railway  ordinance,  235. 
Technology, 

electric  railway,  209. 

electricity  supply,  305. 

gas-works,  279. 

telephone  utilities,  325. 

water-works,  246,  250. 
Telegraph  intercommunicating  sys- 
tems, 319. 
Telegraph  rates,  8. 
Telegraph     switchboard     for     tele- 
phones, 320. 
Telephone  utilities, 

adequate  service,  328. 

automatic  systems,  327. 

business  development,  320. 

commission  regulation,  332. 

compared  with  localized  utilities, 
327. 

compared     with      transportation, 
327. 

cost  analysis,  343. 

cost  of  service  in  rates,  336. 

exchange  practice,  325. 

expense  apportionment,  340. 

history,  318. 

investment  peculiarities,  329. 

long-distance  service,  321. 

rate-system  development,  330. 

subscribers'  classes,  339. 

switchboard  development,  320. 

technology,  325. 

toll  rates,  8. 

transmitters,  319. 

value  of  service  in  rates,  331. 
Telephone-type  electricity  tariff,  311. 
Tests  for  fixed  operating  and  cus- 
tomer costs,  21,  217. 
Traffic  surveys  in  Chicago,  Pittsburgh, 
Providence,  San  Francisco,  Phil- 
adelphia,   Milwaukee   and   De- 
troit, 224. 


386 


INDEX 


Transfer  tickets  on  street  railways, 

232,  239. 
Transportation, 

compared  with  telephone  service, 

319. 
history  of,  162,  201,  208,  212,  225, 

234. 
rate  problems,  168,  178,  203,  213, 

218. 

Trunk-line  railway  rates,  175. 
Twining,  W.  S.,  230. 

Unaccounted  water,  264. 
Unearned  increments,  48. 
Uniform  rate  for  gas,  283. 
Uninterrupted  electric  service,  308. 
Urban  rapid-transit  rates,  229. 
U.  S.  Census  Bureau,  252,  259,  278, 

304. 

Uses  for  electricity,  303. 
Utilities  Bureau,  54,  296. 
Utility, 

all  problems  met  hi  electricity 
supply,  300. 

burdens,  150. 

classes,  5. 

commission  regulation,  1,  12,  32, 
104,  134,  140,  163,  202,  225,  238, 
243,  286,  312,  332. 

denned,  2. 

discrimination,  4,  147. 

improper  activity,  145. 

interference,  144. 

monopoly,  151. 

obligations,  3. 

overcapitalization,  147. 

product  type,  5,  242,  283. 

public  policy,  149. 

regulation  affects  water  rights,  73. 

service  type,  5,  167,  201,  205,  215, 
242,  300,  327. 

Wisconsin  law,  140. 

Vanderzee,  G.  W.,  317. 
Vail,  T.  N.,  320. 
Value  of  natural  gas,  287. 
Value-of-service  in  telephone  rates, 
331,  333. 


Valuation, 

cost  of,  53. 

contingency  allowances,  81. 

discarded  plant,  83. 

inventories,  54. 

overhead  allowances,  77. 

problems,  52. 

purpose,  42. 

quick  methods,  56. 

railway,  197. 

storage  reservoirs,  76. 

water  rights,  69. 
Value, 

affected  by  adaptability,  62. 

affected  by  original  conditions,  45. 

amortization  of  intangibles,  91. 

commodity,  in  railway  rates,  179. 

disclosed  by  accounts,  44. 

disclosed  by  appraisal,  44. 

effect  of  design  and  location,  92. 

fire-protection,  256. 

franchise,  65. 

going  concern,  41,  85. 

of  service,  in  rates,  10,  11,  178,  256, 
258,  331. 

paving  over  mains,  63. 
Variation  of  gas  cost  with  quantity, 

285. 
Vermont  water-works,  241,  261,  276. 

Water, 

consumption  data,  249. 

leakage,  264. 

meters,  249,  260,  264. 

rates,  240,  265,  267. 

requirement  curves,  254. 

requirements  for  good,  245,  250. 

supply  commissions,  243. 

unaccounted  for,  264. 

uses,  245,  250. 

waste,  260. 
Water  rights, 

and  utility  regulation,  73. 

are  real  estate,  69. 

comparison  as  basis  of  approval, 
67,  70,  72. 

nature  of,  68. 

split  into  elements,  69. 


INDEX 


387 


Water-works, 

accounting,  259. 

costs  of  extended,  258. 

early,  240. 

fire  protection,  250,  253,  255,  257. 

in  typical  cities,  267. 

investment,  242. 

regulation,  243.. 

technology,  246,  250. 
Watson,  T.  A.,  320. 
Wear-and-tear  deterioration  expense, 

24. 

Welfare  work  a  service  cost,  20. 
Western  Electric  Co.,  320. 
Western  Union  Telegraph  Co.,  320, 

321. 

Westinghouse-Stanley       alternating- 
current  system,  302. 
Wisconsin, 

electric  companies,  310,  312,  316. 

electric-railway  dividends,  215. 

Electrical  Association,  317. 

electricity  tariff,  312. 

first  electric  railway,  209. 

gas  companies,  285,  287,  296,  297. 

going-value  computations,  87. 

municipal-plant  control,  4. 


Wisconsin  (cont.), 

Railroad  Commission,  59,  88,  89, 
219,  229,  235,  238,  309,  338,  340. 
street-lighting  contract,  316. 
street-railway   fare  schemes,   219, 

237. 

telephone  cases,  338,  341. 
utility  law,  140. 
water-works,  276. 

Winthrop,    Mass.,    water    consump- 
tion, 261,  271. 

Worcester,  Mass.,  water-works,  241. 
Working  capital,  interest  as  service 

cost,  20. 
Worth, 

as  basis  of  earnings,  36. 
of  express  companies  property,  202. 
of  service,  10. 

see  also  Value,  Valuation  and  De- 
preciation. 

Wright,   Arthur,    maximum-demand 
indicator,  7. 

Zone  system, 

express  rates,  205. 
railroad  rates,  176. 
street-railway  rates,  218,  237. 


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